pwc financial institution continuous cost management

7/27/2019 Pwc Financial Institution Continuous Cost Management

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fs viewpoint www.pwc.com/ si

2012: The Revenue Is Not Coming Back:Its Time to ManageCosts Differently

02 13 17 25 29

Point of view Competitiveintelligence

A framework for response

How PwC can help Appendix May 2012
http://www.pwc.com/fsihttp://www.pwc.com/fsi


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Point of view


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3Point o view

Battered by a weak economy, thenations biggest banks are cutting jobs, consolidating businessesand scrambling for new sourcesof income in anticipation of afundamentally altered nanciallandscape requiring leaneroperations In response,bankers are turning to the onearea that is easiest to controlcosts. They have begun programsaimed at cutting operatingexpenses, which have risenalmost 13 percent since 2008. The New York Times 1

There is widespreadagreement in the nancialindustry that a newnormal exists. Withincreased regulation andcapital requirements as well as limited revenueleverage, we believe that signi cant business-modelchange will be needed going forward.

1 Eric Dash, Pro ts Falling, Banks Con ront a Leaner Future,The New York Times , August 28, 2011.

2 Joseph H. Cady and Nichole Jordan, Remaking Your Bank in theNew Normal, ABA Banking Journal , March 9, 2011.

Have paradigm shifts in economic

conditions, regulatory requirements, andcustomer needs created a new normal in theenvironment in which we will operate?... All told, the sum of these changes to thebanking landscape suggests that a newnormal does exist, perhaps not permanently for all conditions, but for most changes atleast on a protracted basis for some timeto come. Not only must bankers overcomethe fatigue associated with operating underthese dif cult conditions for an extendedperiod, they must understand how theirbank ts within this new environment. ABA Banking Journal 2


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4 FS Viewpoint

Given the macroeconomic forecast, nancialinstitutions can no longer grow their way out of their problems. Instead,they must make dif cult choices regarding their operating models.

1 Ben Bernanke, Federal Open Market Committee Press Con erence,January 25, 2012. Transcript available rom: www. ederalreserve.gov. Accessed February 9, 2012.

2 Steven M. Davido , As the Economy Goes, So Go Takeovers,Even Though Bargains Abound, The New York Times , October 18,2011.

3 Ibid.

The current economic environment,both in the United States and abroad,continues to prove challenging.

In his press conference on January 25, 2012,Federal Reserve Chairman Ben Bernankeremarked, Incoming information suggeststhat the economy has been expandingmoderately, notwithstanding some slowingin global growth. The Committee expects thepace of economic growth to be moderateover coming quarters, re ecting ongoingdrags from the housing sector and still-tightcredit conditions for many households andsmaller businesses. Speci cally, participants

projections for the growth rate of real grossdomestic product in 2012 have a centraltendency of 2.2% to 2.7%. Strains in global

nancial markets continue to pose signi cantdownside risks to that outlook. (See chart.)

For advanced economies, the InternationalMonetary Fund estimates growth of only 1.9%in 2012 compared with a historical average of about 3%.

The European sovereign debt crisis has

worsened the economic growth problem. And the uncertainty over how far the crisis will spread in Europe is bound to drive downtakeover volume.

Federal Open Market Committee (FOMC) projections orreal GDP growth and civilian unemployment rate

-4

-2

0

2

4

6

8

10

12

2014201320122011201020092008200720062005

Real GDP GrowthCivilian Unemployment Rate

l i li l

l i

5

4.42.81

2.38 2.21

-3.32

-0.54

3.14

0.87

2.453.00

3.65

4.86.9

9.9

9.68.7

8.357.75

7.15

Projections for

20122014

Note: Unemployment rate and GDP projections are centraltendencies (mean)

Sources: Federal Reserve Board and Haver Analytics


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5Point o view

Business areas that traditionally providedrevenue growth for nancial institutions arenot growing suf ciently toovercome new capital andregulatory requirements.

Activity levels of several major nancial sector businesses are at or declining.

Total revenue for US domestic broker-dealer operations as of Q4 2010 were approximately half their high of $128,835 million in Q4 2007.

Mortgage loan applications for purchases have declined steadily since January 2005.Commercial and industrial lending were 15% lower in February 2012 than the high inOctober 2008.

Source: Federal Reserve Board, Haver Analytics, and PwCcalculations. January 1, 2005 = 100.

Commercial & Industrial (C&I) Loans in Bank Credit: All Commercial Banks, Seasonally Adjusted

0

20

40

60

80

100

120

140

160

180

200

I n d e x

J a

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0 0 5

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J a

n 2

0 1 1

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0 1 1

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n 2

0 1 2

J u

l 2

0 1 2

174.07

148.02

Source: SIFMA. US domestic broker-dealer operations of allNASD and NYSE member firms. www.sifma.org. AccessedJanuary 26, 2012.

128,835.9

US Securities Industries Total Revenue

0

20000

40000

60000

80000

100000

120000

140000

65,150.4

U S $ m

i l l i o n

1 0 : Q1

0 9 : Q1

0 8 : Q1

0 7 : Q1

0 6 : Q1

0 5 : Q1

0 4 : Q1

0 3 : Q1

0 2 : Q1

0 1 : Q1

Source: Mortgage Bankers Association / Haver Analytics.March 16, 1990 = 100.

Mortgage Loan Applications for Purchases,Seasonally Adjusted

0

100

200

300

400

500

600

V o

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6 FS Viewpoint

The new normal is providing a wake-up call to nancial institutions.

With increased regulatory capitalrequirements, lower trading volumes,shrinking balance sheets, moreconservative risk appetite, cost-cutting,and declining pro ts, nding new waysof doing business has become critical.

Capital is now a key driver in all strategic business decisions. Amount,usage, and return on capital are dictating business-model decisions. Financial institutions are waking up to the following needs: Divest non-core businesses. Eliminate underperforming businesses. Extract the maximum return on equity (ROE) from their core

performing business.

Key Metrics or S&P Financial Services Index 2005-2012

Open Jan 2005 = 401.56 Close Mar 2012 = 212.84

High May 2007 = 506.99 Low Feb 2009 = 101.15

S&P 500 Index versus S&P Financial Services Index

0

20

40

60

80

100

120

140

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0 1 2

S&P Financial Services indexS&P 500

Source: Wall St. Journal, Standard & Poor's, Haver Analytics,and PwC calculations. January 1, 2005 = 100.

Provisions Continue to Decline,but Revenues are Not Growing

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2 0 0 5 Q2

2 0 0 4 Q4

2 0 0 6 Q2

2 0 0 6 Q4

2 0 0 7 Q2

2 0 0 7 Q4

2 0 0 8 Q2

2 0 0 8 Q4

2 0 0 9 Q2

2 0 0 9 Q4

2 0 1 0 Q2

2 0 1 0 Q4

2 0 1 1 Q2

2 0 1 1 Q4

Net operating revenueLoan Loss Provision

NOTE: Net operating revenue = net interest income+ non-interest incomeSource: FDIC. Quarterly Banking Profile Second Quarter 2011,Chart 3. www.fdic.gov


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7 Point o view

Given the dismal outlook,many nancial institutionsare seeking to reduce their cost base. However, many of the approaches taken havenot been fully effective.

1 Sarah White and David Hulmes, Nomura axe hangs over 5 pcto European sta ,Reuters News , September 13, 2011,www.reuters.com.

Common short-term cost-cutting measures Limitations

Headcountreductions, hiring

reezes, and bonus

reductions

By September 2011, nearly 100,000 planned andactual layo s had been announced by banks in theUS and Europe.

Causes morale to drop; headcount andcompensation usually dri t upward as ocus oncost reduction wanes.

Elimination o non-core businesses

Many nancial institutions are divesting non-core businesses to reduce costs, strengthenmanagement ocus, and comply with newregulatory requirements.

Stranded costs related to divested assets, suchas shared services or technology expenses, o tenremain a ter a divestiture.

Policy changes Many nancial institutions are tightening theirpolicies or expenses, such as rst-class travel,events, non-client entertainment, and meals.

Employees may become cynical when policies areseen as being dictated by changes in P&L.

System andprocess reviews

Institutions are expanding existing outsourcinginitiatives and exploring new ones in areas suchas nance, research, operations, and ront-endbusiness support. Large technology spendsare also being assessed or their potential ROI.Internally sponsored programs, such as leadership,diversity, advertising, and corporate phil anthropy,are being scrutinized as well.

An institutions operations and morale can besigni cantly impacted. Projects take a long time tobear results.

Financial institution stock pricesare a re ection of the new normal.

Banks have not become moreef cient despite their cost-cutting efforts.

Efficiency Ratio (%) for US Commercial Banks

45

50

55

60

65

70

66.02

57.77

2 0 0 7 Q1

P e r c e n t

2 0 1 1 Q1

2 0 1 0 Q1

2 0 0 9 Q1

2 0 0 8 Q1

Source: SNL Financial data


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8 FS Viewpoint

Going beyond individual,one-time cost-cutting programs, leading institutions are breaking down historical barriersto better manage costs in amore sustainable way.

Traditionally, when normal businesscycles start to take hold, institutionalexpenses start to creep up again

However, with nancial institutions beingunlikely to grow their way out of their currentproblems, new tools are needed to enable

nancial institutions to maintain expensediscipline enterprise-wide. Leading institutionsare strategically approaching this challengeby implementing a continuous expensemanagement process as opposed to short-termcost-reduction initiatives.

Our de nition of continuous expensemanagement:

Ensuring that the organizations use of resources matches its ability to generate asuf cient return to shareholders.

Elevating the management of costs tothe same relentless focus as revenue andcustomer service.

Maintaining a permanent, integrated focuson organizational ef ciencynot a project-related response to market conditions.

We have observed that approaches to expense management undertakenby nancial institutions vary across the following spectrum.

Key actions/Steps Common obstacles Historical cost-reduction approach Continuous expense management

Engage the board o directors and theCEO, and hold them accountable

Cost ocus has typically been point-in-timeand in the nature o a relatively short-termprogram. This view needs to change.

The CEO talks about the need or cost-cutting initiatives.

Cost-reduction targets are communicatedto the organization.

Progress reviews are held quarterly.

The CEO involves the board in strategicdecisions regarding expense managementand reports progress to the board monthly.

Expense management initiatives are reviewedweekly by the CEO.

Cost-reduction targets are communicatedand clearly understood by the entire

enterprise.

Utilize rewards and incentives Strategic goals around expense managementwill need to be built into per ormancescorecards or relevant management.

The institution ocuses on cost-cuttinginitiatives and dollars saved, but mayoverlook individuals who drive cost-cutting results.

Employees are not given meaning ulincentives or rewards or their cost-management e orts.

Employees at all levels are given expensemanagement responsibilities and heldaccountable.

Benchmarks and metrics are agreed uponand communicated to all employees.

Results are evaluated and communicatedrequently, not just annually, so employees

are rewarded or their e orts and results in atimely manner.


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9Point o view

Going beyond individual, one-time cost-cutting programs, leading institutionsare breaking down historical barriersto better manage costs in a more sustainable way. (continued)


Build a cost management andproductivity unction

Such structures are typically temporary tosupport the cost-reduction program.

A cost czar is appointed. Ad hoc committees are ormed to ocus on

cost-cutting ideas. Senior executives are given dual

responsibilities or handling ull-time positionsand cost-cutting committees.

A cost and productivity unction is headed bya senior executive.

The executive maintains a matrix relationshipto other key employees throughout theorganization to manage costs.

The newly built unction provides tools,metrics, and support to the entireorganization, both or managing expense andmeasuring productivity.

The appropriate expense managementspecialists are involved in real-time expensedecision making.

Review current cost-allocationprocedure and develop relevantallocations and mapping

Institutions typically do not have atransparent understanding o their costs. Itcan take time and investment to reengineerthat process.

Few e orts are made to educate currentbusiness owners about cost-allocationmethodology.

There is little understanding o the true driverso costs and limited or no transparency intothe cost-allocation process.

Allocation is based on cost drivers that refectthe true consumption o resources.

Legacy cost-allocation processes areupdated to refect current operations andto measure the cost o servicing particularproducts and customer segments.

Business owners are provided with supportto understand the allocation process. Thisallows revenue generators to assist inidenti ying areas or cost reduction.


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10 FS Viewpoint

Going beyond individual, one-time cost-cutting programs, leading institutionsare breaking down historical barriersto better manage costs in a more sustainable way. (continued)


Deepen understanding o costs throughmultiple lenses

Super cial understanding o costs leads toGL-based cost cutting exercises.

Businesses and unctions hack awayat costs until they meet headline costreduction targets.

Necessary strategic discretionary spend iso ten a casualty.

A GL view o cost, with a transparentunderstanding o the cost drivers, helps toachieve line item cost improvement.

An investment view considers whether theexpense will justi y the return, or example,in terms o building capability/capacity or

launching a new unction. A business view looks at the costs as

part o a business metric or businessprocess. This highlights opportunitiessuch as improving productivity, combiningbusiness unctions, and restructuringoperating models.

Assess need or business- andoperating- model changes

Demanding exercise requiring broad seniorexecutive support and top-down ocus.

Business and operating model reviews havenot traditionally been associated with cost-management e orts.

Emerging business models, deliverychannels, customer needs, and technologicalinnovations are assessed to identi y ways tomanage/alter operational cost models.

Examples include: leveraging digital channels

to attract, service, and retain customers;establishing shared-service utilities; realigninggeographic ootprint to business; andassessing market needs.


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11Point o view

Going beyond individual, one-time cost-cutting programs, leading institutionsare breaking down historical barriersto better manage costs in a more sustainable way. (concluded)


Conduct broad and ongoing review oinvestment port olio

Inability to identi y and categorizeinvestments.

Inadequate structure, tracking, andgovernance.

Typically, businesses have not useda port olio view to assess how andwhere cost-management initiativesshould be ocused.

Port olio view o all investments is developed; strongprocesses and governance mechanisms are instituted toensure that investments can be tracked and categorized intogroups such as option creating and stay in business.

Ongoing port olio review is conducted to ensure balancebetween investment categories. This avoids stifing

innovation while also preventing a single-minded ocus onbreak- x activities.

Evaluate productivity and e ciency oexisting processes/ unctions

Lack o buy-in to evaluate processes,unctions, and technologies that are

working or have worked in the past.

Historically, rms have not ocusedon e ciency and/or productivity as ameans to driving cost reduction.

Material processes, unctions, and enabling technologies areevaluated or productivity/e ciency opportunities.

Necessary adjustments are then enabled to drive costsavings through improved processes, unctions, andtechnologies.

Example changes may include automation, labor arbitrage,establishing center o excellence, among others.

Update and re resh analytical toolsand reports

Organizations typically havedeveloped sophisticated analytic

reporting on the revenue side, not onthe expense side. Investment will beneeded or sustainable process.

Detailed expense reports are createdoutside the traditional reporting

environment. Reports are used as indicators o

per ormance, but not as predictors obehavior.

Flexible and detailed analytical tools and expense reports areavailable or scenario modeling and comparative analytics.

Monthly expense reports are detailed, relating businesses,geographies, and expense-line per ormance to budget, prioryears, and rolling three months.

Reports are in a relevant ormat and provide a comparison othe institutions expenses against industry benchmarks.

Reports incorporate productivity metrics that can also bemeasured against peer per ormance.


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12 FS Viewpoint

As part of their continuousexpense management programs, leading nancialinstitutions also utilize productivity metricsto quantify results andmeasure success.

Peer-group comparisons of productivity metrics provide a useful benchmark for tracking continuous progress, as shown in the illustrative examples below.This not only quanti es results, providing clear support for business cases andhighlighting areas of focus, but also helps institutionalize expense management

as an ongoing process.

Retail productivity comparison (2006-2011) EBITDA per employee (2002-2011)

Consumer nance Company A

CompanyB

Sectoraverage

P r o d u c t i v i t y

Revenue peremployee

$437,000 $593,000 $245,000

Change in revenueper employee

108% -4% 8%

Operating income

per employee

$260,000 $190,000 $73,000

Change inoperating incomeper employee

307% -2% -25%

G r o w t h Revenue growth 39% 32% 30%

Operating incomegrowth

183% 41% -10%

P r o f t a b i l i t y Operating margin 48% 39% 31%

Change inoperating margin

22% 4% -9%

-$50,000

$100,000

$250,000

$400,000

2 0 0 2

2 0 0 3

Company A Company B Consumer f inance sector

O p e r a

t i n g

i n c o m e

/ e m p

l o y e e

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

Product iv ity CAGR: 08-11 Share price CAGR: 08-11

124.0% 4.3%

-48.0% -32.1%

-3.1% -57.3%


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Competitive intelligence

Our observations of industry practices.


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14 FS Viewpoint

Leading On Par Lagging

What we observe in the industry

Success actors Financial institution A Financial institution B Financial institution C

Overall senior executive engagement CEO reviews cost initiatives monthly,with sole ocus on savings rather thandetails o program.

No board review o progress on costinitiatives.

Senior business leaders conductmonthly meetings and take ultimateaccountability.

CEO gives updates o the cost-reduction project to nance committeeo the board every month.

Committee consisting o CEO, COO,CFO, and CAO monitors the projectbiweekly.

Agreement on budgets, goals, andaction plan (including timeline) on itemsacross the rm.

Group CEO leads a high-pro leinitiative; rapid progress is being madeboth globally and in the US on costreduction.

From a project standpoint, senioroversight committees have been

ormed. However, these will likely standdown once cost-reduction goals havebeen met.

Strategic business-model changes

Strategic review o all global productmarket shares and plans or whichproducts should receive investmentdollars.

Key decisions regarding geographic

ootprint based on resource needs,business, and competitive advantage.

Signi cant ocus on o -shoring allsupport group unctions.

Enhancement o project managementmonitoring processes, particularly thoseprojects where costs exceed certainthresholds.

Stricter rules on exit strategy (such as

risk-adjusted return on capital e ciencyratio targets) or lagging business lines.

No exception to application o cost-management process to any (pro table)businesses (no sanctuary policy).

Standardization o core businessesacross every region.

Aggressive elimination o non-corebusinesses in speci c regions (includinglarge high-pro le businesses) and laser

ocus on hurdle-rate return on equity.Simpli cation and de-layering oregional structures to drive productivity.

Many recent and current programs show aggressive senior management involvement, but still lack criticalelements to drive sustainedimprovement in the cost structure.


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15Competitive intelligenceCompetitive intelligence




Ownership o cost-cutting initiatives Subject matter experts develop actionplans and goals, with every majorexpense bucket having an owner.

Transparent budget and action planare managed jointly with businessand cost-control organization.

Every expense in the organization issubject to review. No area is consideredo -limits.

Drivers o cost-cutting initiativescome rom a specialized expensemanagement group.

Each line o business develops anaction plan.

Special Program Management O cehandles nancial data on the costreduction.

Transparent budget and action planshared with all owners.

Little understanding and consistency/ transparency as to how costs areallocated within the organization.This has not delayed or slowed downaggressive cost-reduction e orts.

Aggressive project plan, managedtop-down. Targets or cost reductionclearly set and understood by all.

Cost allocation and mapping Cost allocation is reviewed, but thereis no strong e ort to change existing

methodology; would rather givetransparency to existing process.

A common set o nancial indicatorshas been agreed upon to evaluate

and identi y businesses that shouldbe exited. The cost allocation andmapping methodology is mostlyproject-related rather than a ramework

or understanding/ managing costs inthe uture.

Despite rationalization o businesses,little ormal work on stranded cost

elimination due to lack o transparencyand understanding as to how costs arereally allocated.

Many recent and current programs show aggressive senior management involvement, but still lack criticalelements to drive sustainedimprovement in the cost structure.(continued)


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16 FS Viewpoint




Analytical tools and reports

Elements o a continuous processstarting to emerge through monthlybusiness reviews, quarterly reporting,metric and goal analysis.

Budgeting process refects saves romcost-cutting initiatives.

Use o cross-business metrics toincentivize better per ormance.

Biweekly business review/progresscheck on big-ticket items; all mainlyassociated with project progress.

Benchmarking to competitors.

Solicit small ideas rom employees andadopt them to maintain motivation.

Global reporting on cost reductioninitiated; however, due to project-basednature, reporting will likely cease oncethe project is completed.

Top-down targeting o cost base ande ciency ratio targets.

Entire rm-wide approach

All businesses and support groupsdedicate a team or individual to ownsavings ideas and be accountable orexpense results.

No savings initiative embarked on until itis thoroughly understood in a businesscontext.

Firm-wide agreement on budgets, goals,and action plan.

Top-down approach on enterprise-widereorganization initiatives.

No area is o -limits or cost reduction.

All businesses a ected and alltrans ormation programs are underreview.

Multiple approaches and work-streamsare evident, including rationalizationo spans and layers and review/ disposition o non-critical businesses.

Many recent and current programs show aggressive senior management involvement, but still lack criticalelements to drive sustainedimprovement in the cost structure.(continued)


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A framework for response

Our recommended approachto the issue.


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18 FS Viewpoint

A properly designed expense management process increases the transparency of costs throughout the organization and strengthens the tools designed toanalyze them.

Institutions need effective,continuous expensemanagement to extract value from business-modelchanges. Productivity improvements becomethe barometer for successof continuous expensemanagement.

Continuousexpense

management

Defineexpense

managementroles and

responsibilities

Establishownership at

the seniormanagement

level

Measure andreward expense

managementresults

Design soundanalytical tools

and reports

Rethink costallocation and

mappingprocess


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19 A ramework or response

To achieve this, adopt a top-down approach by engaging the CEO andsenior executive management. Their attitudes and actions toward expensemanagement shape the environment and focus of the organization.

An organization sends an important message about the priority of expense managementbased on:

With top-down support,expense management should become a leading practice and be perceived asa key success factor.

Holding cost performanceand productivity to thesame rigor asrevenue performance.

The place of expensemanagement functions onan organizational chart.

The utilization of expensereporting and metrics tomanage costs.

The inclusion of expensemanagement input inrelevant decision making.

The rewards implementedfor effectiveexpense management.


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20 FS Viewpoint

De ne roles and responsibilities

The CEO should appoint an of cer responsible for expense management who drives the expensemanagement strategy.

A senior executiveideally a businessunit leader or nance executiveshould be appointed to the role of cost and productivity of cer.

This executive is responsible for the entireexpense management agenda, includingprocurement, outsourcing and off-shoring,and major reengineering and transformationprojects. This executive should also own theentire cost-capture and allocation processas well as the cost side of the planning andforecasting processes. In addition to reportingto the CFO/COO, the cost of cer shouldperiodically report the status and resultsof initiatives to the board so that they canalign the input they provided to the resultsbeing obtained.

Responsibilities include:

Engages all aspects of rm with relevantexpense information/action plans to impactbusiness decision making.

Creates multiple forums for enterprise-wideout-of-the-box ideas.

Creates rm-wide matrix cost organization:major expense owners, who manage largeexpense buckets.

Builds a small team of expense andproductivity experts, who partner with theorganization to provide timely information,deep dive analysis, competitive information,and savings ideas.

Rethinks and reenergizes expense andproductivity reporting to make themrelevant to business owners.

Is accountable for crisp execution of allexpense plans.

Partners with nance to make expensebudgeting, forecasting, and performance adynamic exercise.

Rethinks the cost-allocation methodology.

The cost and productivity of cershould have a small team of skilledsenior business executives who areresponsible for the cost agenda.

Each major expense category, whether it isfunctional expense such as legal or the totaldirect expenses of a business unit, shouldhave an owner. In addition to their normalreporting lines, these executives will report allexpense management-related business to thecost and productivity of cer. Traditional cost-center structures are likely to be a casualty.


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Rethink cost allocation andmapping process

The cost and productivity of cer should developrobust processes to capturecosts and allocate thembased on measurableconsumption by thebusiness.

Additionally, solving the questionsabove addresses the issue of stranded costs.

As organizations continue the process of deleveraging and become more disciplined withtheir capital, divestitures are becoming morecommon. Increased transparency illuminates

the costs that have become stranded and allowsmanagement to assess if and when those costscan be reduced in a more timely manner.

Why are costs consumed,and who is consumingthem?

How do unit costs varyby demand volumes?How xed or variable arethe costs, and who isresponsible (the demandside or the supply side)?

What are the cost driversor di erent categories o

expense and or di erentconsumers o cost ( orexample, transactionvolumes, number oemployees, or square

ootage)? Is this readily available

and measurable? Can it betransparently automatedinto the allocation andreporting process?

Does the cost-centerstructure clearly refectthe services provided andconsumed?

Do cost-center ownersown whole processes,and are they rewardedand capable o drivinge ciency?

Does the business getprompt itemized reports oncosts allocated to them?

Does the business onlypay or service consumedor capacity provided? Isthere a corporate tax?

Is there any negotiationinvolved, or example,during the annual budget

setting process?

Key principles of cost allocation Design cost centers in line with

what you want to measure. Analyze and allocate based on

true cost drivers. Have transparent documentation

of cost allocation in place. Continuously review allocated

costs to identify those that do notadd value.

Understand the costs Rationale for allocation Capture costs by category Allocate and report


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22 FS Viewpoint

Design sound analytical toolsand reports

Reports should be timely,easy to use, and serve asthe business template for expense discussions.

Once cost-capture and allocation processes are in place, the cost and productivity of cerrequires exible analytical tools that enable scenario modeling and comparative analytics acrossbusiness units and geographies. These tools should adapt easily to changes in the performancemanagement framework. As expenses are incurred infrequently, such as at year-end only, it is

important for the institution to understand trends and anticipated expenses when performingmodeling and analytics. Reports should also include external metrics for individual expenses toallow for industry benchmarking. Results should be communicated in a timely manner to all users.

Trailing 3 Months Variance YTD Variance

Apr2011

Actuals

May2011

Actuals

Jun2011

Actuals

Jul 2011Forecast

Jul 2011 Actuals

Jun 2011 Actuals

Jul 2011Budget

Jul 2010 Actuals

Jul 2011 Actuals

Jul YTD 2010 v.Jul 2011 YTD

DivisionsBusiness Development

T&E 5.0 3.5 3.1 2.9 3.6 (0.5) (0.7) 27.0 24.9 2.1

Corporate Events 1.3 0.9 1.1 0.8 0.3 0.8 0.5 8.5 7.5 1.0

Total Business Development 6.3 4.4 4.2 3.7 3.9 0.3 (0.2) 35.5 32.4 3.1

Tech & Comm

Mail, Print 0.7 0.7 0.6 0.5 0.6 - (0.1) 0.6 0.7 (0.1)

Market Data 4.9 4.7 4.3 2.8 4.3 - (1.5) 30.3 25.7 4.6

Technology 0.3 1.1 0.8 0.6 0.7 0.1 (0.1) 4.2 4.0 0.2

Total Tech & Comm 5.9 6.5 5.7 3.9 5.6 0.1 (1.7) 35.1 30.4 4.8

Geographies Asia

China 17.1 16.6 15.7 14.6 14.7 1.0 (0.1) 97.8 93.8 4.0

Japan 9.6 9.3 9.5 9.3 9.3 0.3 0.1 63.9 62.5 1.4

Singapore 5.6 5.4 4.7 4.5 4.7 0.0 (0.2) 28.1 25.0 3.1

Total Asia 32.3 31.2 29.9 28.4 28.6 1.3 (0.2) 189.7 181.2 4.5

Europe

France 15.0 17.4 15.3 12.6 12.7 2.6 (0.1) 89.5 90.6 (1.1)

Germany 7.5 10.1 7.2 9.7 9.7 (2.5) 0.1 57.4 54.6 2.8

Switzerland 3.5 6.2 5.1 4.2 4.4 0.7 (0.2) 28.5 23.6 4.9

Total Europe 26.0 33.7 27.6 26.5 26.7 0.9 (0.2) 175.4 168.8 7.7

Reports generated are detailed at variouslevels, including business unit, geography,division, and support area; this detail shouldbe available in a timely manner.

Actual per ormance results can becompared against the previous yearand rolling three months.


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Design sound analytical toolsand reports

The appropriate use of dashboards and analysishelps rms embedcontinuous expensemanagement into their operations.

Going forward, nancial institutions should embed continuous expense management into theirstrategic business models. When supported by robust processes, this will help end the cycle of cutting costs when revenues fall, and boosting spending when revenues rise. Using the rightreports and analysis will help institutionalize the concept of continuous expense management.

The above example illustrates how one leading institution uses enhanced expense data to get amulti-dimensional, time-sequenced view of its enterprise-wide spending. This enables targeted,deep-dive analysis of unexpected trends where appropriate.

Three-month expense trends

Division Region Expense line

0

50

100

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250

OtherCorp

ITDOtherRev

MORTIMIBEQFICC

April May June

0

50

100

150

200

250

OtherOccupProffees

Tech & comms

Busdev

Varexp

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AsiaEurope Americas


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24 FS Viewpoint

Measure and reward results

Executives should be held

accountable for achieving expense management goalsby linking compensationand rewards withrealization of those goals.

In partnership with human resources, the CCO should lead an effort to include enterprise expensemanagement goals and reward individual staff efforts to drive sustainable cost savings as partof an enhanced performance review process. Performance reviews should include measurableperformance against expense targets similar to revenue or other individual goals.

The CCO should focus on the following:

Compensation levels in 2011 were down as much as 30%, driving changes tocompensation practices going forward. Pay has to be linked to performance. Pay must correspond to return on equity. The compensation rate must allow for an adequate return to shareholders. Not everyone gets a bonus.

Evaluate

Reward

Communicate

Encourage a forum or culture inwhich not only those executivesresponsible for expensemanagement can be rewarded. Allstaff levels should be encouragedto follow sustainable costreduction. For example, iPlace isPwCs internal Web forum forsharing revenue-generating orcost-saving ideas.

Communicate to major expenseowners that expense managementresults will be integrated into theirperformance review.

Ensure that responsibilities areclear and controllable. Forexample, if a manager budgets fora 5% increase in a commodityprice but it unpredictably rises by10%, this should not reflect poorlyon the manager.

However, if th e same managerrequests 50 man-hours ofshared-service support but onlyutilizes 30 man-hours, anyassociated cost incurred by theshared service should be allocatedback to that manager.

Develop and monitor keyperformance metrics continuously.In a timely manner, review actualresults against that executivesgoals.


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How PwC can help

Our capabilities andtailored approach.


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26 FS Viewpoint

Realized benefts across these areas: ClientsReaping the value

Cost-reduction Operations-spend savings rom cost-driver andactivity-level de nition

Discretionary-spend savings rom non-critical,contingency, or unsupported balances

Headcount-reduction savings via unctionalbenchmarking analysis

Contract-leakage savings and other invoice-controlsavings via a orensic contract analysis

On average, our clients Save $5 to $20 o cost savings

or every dollar spent in ees Achieve approximately

5% to 10% in cost-reductionopportunities identi ed via

orensic contract reviews Realize cost reductions ranging

rom 20% to 30% o thein-scope cost base as a resulto productivity improvements,reductions in cycle time andlead time, and working capitalreductions

Strategic expensemanagement and controls

Strong budget ownership, discipline, and accountabilityestablished

Outline o critical expense management and controlde ciencies identi ed via gap analysis

Meet cost-reduction demands o regulators, boards,and other stakeholders in this sensitive area

Trans ormation Improvements to organizational structure, capabilities,and behaviors

Per ormance-measurement and management-processimprovements

Development o productivity metrics and peer-groupbenchmarking

Waste elimination

Cost-capture andallocation methodologydesign

Improved cost-capture and allocation processes tosupport the strategy o the organization and what itwishes to measure

Financial systemsimplementation

Advanced nancial systems architecture to acilitate andmeet regulatory, management reporting, accounting, andtax requirements

It is time for a different approach. Institutionsbene t when cost-

reduction, expensemanagement, andcontrol processes are put in place to support transformationalactivities.

Institutions that leverage PwCs organizational-change processes, tools, and concepts to identify and remediate areas for improvement can position themselves to effect sustainable changeand reap the value. Throughout our engagement, we transfer our knowledge to your staffincreasingly empowering them to lead change efforts going forward.


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27 How PwC can help

Client needs Issues we help clients address

Reduce costs Driving e ciency through shared services Redesigning Finance to realize e ciency and competitive advantage Taking control o cost through e ective spend management and cash orecasting practices Driving sustainable cost reduction

Build e ectiveorganizations

Rethinking strategy in terms o markets, geographies, channels, and clients Restructuring organizational models in terms o structures, policies, and roles Establishing e ective strategic sourcing and procurement Realizing competitive advantage through e ective sales operations inventory planning Trans orming the close and consolidation process to work or, rather than against you

Innovate andgrow proftably

Reshaping the IT unction into a source o innovation Trans orming business in ormation to drive insight and act-based decision making Evaluating acquisition and divestiture strategies to position or the uture Realizing deal synergy and value Developing sustainability programs that add value

Leverage talent De ning and implementing an e ective HR organization Rethinking pivotal talent

Manage riskand regulation

Building a risk-resilient organization Managing Enterprise Resource Planning investment and project execution risk Sa eguarding the currency o business; keeping sensitive data out o the wrong hands A rming capital project governance and accountability Assessing and mitigating corruption risk in your global business operations Accounting and nancial reporting Third-party assurance Taxation

We look across the entire organizationfocusing on strategy, structure, people, process, controls,and technologyto help our clients improve business processes, transform organizations, andimplement technologies needed to run the business.

PwC can partner with youon continuous expensemanagement without

losing focus on the futurehealth of the business.

Clientneeds

Manage risk and regulation

Innovateand growprofitably

Buildeffective

organizations

Reduce

costs

Leveragetalent


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28 FS Viewpoint

What makes PwCs Financial Services practice distinctive.

Integrated global network PwC US helps organizations and individuals create the value theyre looking or.Were a member o the PwC network o rms with 169,000 people in more than158 countries. Were committed to delivering quality in assurance, tax, andadvisory services. Tell us what matters to you and nd out more by visiting usat www.pwc.com/us.

Extensive industry experience PwC serves multinational nancial institutions across banking and capital markets,insurance, asset management, hedge unds, private equity, payments, and nancialtechnology. As a result, PwC has the extensive experience needed to advise on theport olio o business issues that a ect the industry, and we apply that knowledge toour clients individual circumstances.

Multidisciplinary problem solving The critical issues nancial institutions ace today a ect their entire business. Addressing these complexities requires both breadth and depth, and PwC serviceteams include specialists in strategy, risk management, nance, regulation,operations, and technology. This multi-disciplinary approach allows us to providesupport to corporate executives as well as key line and sta management. We helpaddress business issues rom client impact to product design, and rom go-to-market strategy to operating practice, across all dimensions o the organization.

We excel at solving problems that span the range o our clients key issues andopportunities, working with the heads o business, risk, nance, operations,and technology.

Practical insight into critical issues In addition to working directly with clients, our practice pro essionals and FinancialServices Institute (FSI) regularly produce client surveys, white papers, and points oview on the critical issues that ace the industry. These publicationsas well as theevents we stageprovide clients new intelligence, perspective, and analysis on thetrends that a ect them.

Focus on relationships PwC US helps organizations and individuals create the value theyre looking or.Were a member o the PwC network o rms with 169,000 people in more than158 countries. Were committed to delivering quality in assurance, tax, andadvisory services.


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Appendix

Select quali cations.


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30 FS Viewpoint

Streamlined andreenergized expensemanagement through

targeted initiatives toachieve greater gainsGlobal investment bank

Issues A global investment bank with a long record o success ul cost managementound that its expense results lagged behind the industry in recent years. The rm

decided to replace the groups senior management and needed direction to getback to best-in-class per ormance compared to its peers. The bank also stronglydesired to reenergize its cost control e ort throughout the entire rm.

Approach The project was executed in th ree phases. First, a diagnostic was per ormed onthe existing products and services o ered by the cost-management group. Resultsshowed that the group had lost its credibility with the larger organization becauseo overly aggressive budgeting, poorly thought-out cost-control recommendations,and an inadequate skill set within the members o the cost-control group.

Second, extensive interviews with key internal customers identi ed the need ora partnership between internal customers and the cost control group. Finally,based on the clients decision to reduce the size o the cost-control group, PwCdeveloped a roadmap or transition, as well as roles and responsibilities or thecost-control group and its internal customers.

This solution allowed the client to rethink the role o the cost-management group.The bank developed new tools and business-relevant cost reporting, and initiateda major technology revamp o the cost groups in rastructure. The leadership o thecost-management team was replaced with business-knowledgeable, customer-

riendly pro essionals. The cost groups mission was clearly communicatedthroughout the rm.

Benefts Over an 18-month period, the cost-management group returned to best-in-classper ormance compared to its peers, and US$600 million o run rate saves weretaken out o th e rms operating expenses.

With more than 60 positions removed, the headcount o the cost-managementgroup dropped by one-third.


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31 AppendixSelect quali cations

Delivered sustainablecost reductions across thebusinessSuper-regional

US nancial institution

Issues A multi-billion dollar banking institution with ully diversi ed lines o businesssought to signi cantly reduce bottom-line costs in a manner that would causethe least disruption and business risk. Only limited capital was available orany spend-to-save investment. This initiative required multiple skill sets andsubject matter expertise across both institutional and retail businesses, and the

institutions management team needed a service provider that coul d marshal allo these capabilities to help minimize communication and implementation risks.The institution sought a partner that could execute in a manner that were whollyconsistent with its corporate culture, particularly given the sensitivity and likely staimpacts o the engagement.

Approach PwC delivered a proprietary, sustainable cost-reduction methodology through across-line-o -service team, which allowed or speci c subject matter expertise toappropriately align with all in-scope divisions and lines o business. The team alsoper ormed a cross-business analysis to identi y opportunities that spanned multipledivisions, business lines, and areas o management control. Highlights o ourassistance included: Stressing intelligent business-model changes instead o simple per ormance-

based headcount reductions to drive savings and limit required investment. Providing targeted external market analysis and peer and competitor points-o -

comparison where required. Helping to ensure that all recommended changes advanced the organization

toward a leading-practice pro le. Risk managing the process so that corporate communications and HR

considerations were e ectively planned and incorporated throughout.

The collective capability o the cross-line-o -service team enabled PwC toprovide a seamless, integrated solution as well as the necessary subject matterexpertise, leading-practices perspective, and detailed cost-analysis skills required

or success.

Benefts As a result o this engagement, PwC identi ed cost savings o more than 10% o

the total cost base, and the client was able to prioritize and capture these savingsin a manner that ully met its requirements or sensitivity to the business and itssta . PwC identi ed additional savings opportunities in excess o the initialUS$200 million goal.


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32 FS Viewpoint

Improved net pro ts withbetter strategic initiativesbased on accurate

understanding of costs Fortune 500 nancial services institution

Issues In a tough economic environment, the nancial institution was losing accountsand pro ts were declining. Managements vision or recovery involved providinginvestors with access to low-cost securities, acknowledging that this move wouldrequire strict cost control.

The institutions home-grown pro tability system was incapable o delivering

accurate and timely cost metrics. Executives needed a more robust expensemanagement system that would enable them to respond more quickly and to makee ective strategic decisions.

Approach PwCs approach involved an activity-based costing program on a company-widescale, beginning with the study o the existing organizational structure, employeedata, workfows, and expense reports. From this point, PwC was able to determinecost objects and the level at which they should be assigned.

PwC next outlined and de ned cost drivers. Working with cost-center managers,the nance team, and business consumers, PwC was able to rede ne the activitydrivers. With this methodology, and an updated reporting system in place, theinstitution was better able to calculate costs and attribute them to their properowners in quick ashion.

Benefts The process resulted in improved e ciency-delivering pro tability reportswithin two days versus eight weeks under the old system with a greater level oin ormation but using hal the number o employees.

PwC uncovered stranded costs and excess IT capacity, which allowed thecompany to renegotiate its contracts with outside vendors, reeing up capital.

Most importantly, PwCs process provided accurate insight into operational costs,allowing the client to reduce ees and recapture lost customers. The strategicinitiatives developed using this process helped to reduce overall costs and improvenet pro ts by US$600 million annually.


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Accelerated a cost reductioninitiative to create a cost-conscious culture and

achieve targeted savings Fortune 100 multi-lineinsurer

Issues The client sought to identi y cost-savings opportunities to support an externalcommitment to shareholders o a signi cant run-rate expense reduction oUS$250 million by year-end.

Approach PwC per ormed a rapid assessment o the clients expense base and currentcost-reduction program in seven unctional areas through interviews, comparisono leading industry practices, high -level data analysis, and benchmarking. Stepsinvolved included: Per ormance and spend analysis to de ne operational cost drivers; peer and

benchmarking analysis to identi y key eligible areas, priorities, and quick hits;and gathering enterprise nancial data rom internal and public sources.

Meetings with all unctional areas to become amiliar with existing cost-reductionopportunities and per ormance relative to industry leading practices and trends.

Creation and documentation o potential cost-reduction strategies mapped bycost, complexity, and bene t.

Assessment o current program progress and individual cost-reduction ideasbased on complexity and value.

Development o an implementation roadmap.Benefts PwC established the cost baseline through benchmarks and comparisons to

industry leading practices, provided targeted cost-reduction ideas to acceleratethe planning process, and created a roadmap or unctional and enterprise-widesavings.

Projected cost savings exceeded the corporate mandate by more thanUS$150 million.

Our project team set in motion a process to create a cost-conscious cultureor the client to create a sustainable cost advantage.


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34 FS Viewpoint

Performed a comparisonassessment in line withindustry best practices

to achieve greater cost savingsMajor European/ American investment bank

Issues A ter engaging in an initial analysis o the institutions cost structure, a majorEuropean/American investment bank identi ed areas within its investment bankingand private banking operations as opportunities or improvement.

Approach A ter obtaining the baseline data, PwC was able to re ne target opportunitiesoutlined in the institutions plans or restructuring operations unctions. Throughan assessment o the cost data and comparisons to industry best practices andalternative solutions, PwC outlined a solution that would maintain quality whilereducing costs.

This solution bene tted the client by examining the e ects o the individualinitiatives on a standalone basis and in combinations be ore proposing an optimalstrategy. This strategy involved a major redesign o the organizations sta ngpyramid, management layers, and spans o cont rol.

Benefts An overall headcount reduction o 15% in targeted areas led to an associated costbene t o 30% in those key areas. Major outsourcing across the business unitsresulted in additional cost reductions o 15%.


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Issues The clients per ormance struggled in the early days o the nancial crisis. Businesswas shrinking, yet cost allocations were remaining stubbornly high. Business unitheads did not understand why costs allocated to them were so high and lamentedthe absence o transparency in the process. The shared service centers costs werenot captured according to the services provided, but rather were based on theorganizational and hierarchical construct within the center. Accordingly, each costcenters allocation was viewed as rather meaningless to the business.

Approach PwC worked with senior management, shared service center leaders, and the costconsumers (the unctions and business units) to understand the needs o the usersand the services that were required or provided. We were able to categorize theshared service centers into 88 d i erent services and reached agreement on thesecategories with shared service centers and consumers. Not all services were readilyunderstood by users, prompting us to prepare a service dictionary describingeach service, explaining why it was required, and identi ying the likely drivers othat service.

Based on agreed cost drivers, we worked with the technology group to capturedriver in ormation in an automated and seamless manner and to use it to drive costallocation within the engine we developed or that pu rpose. Where necessary, proxy

drivers acilitated allocation. The design was built out into a new cost-capture,allocation, and reporting model, overlaid with a simple invoicing system itemizing allthe allocations or the cost consumers.

Benefts The new tools and processes were quickly and success ully implemented andprovided a sound basis or the expense management activities the institutionimplemented a ter 2009. Senior management acknowledged that they now hada reasonable and transparent process to allocate costs, as well as levers tomanage costs.

When the organization divested a major subsidiary, the new processes andtransparency allowed it to develop a plan to eliminate 88% o stranded costassociated with the divestiture (a previous divestiture had ailed to achieve 40%).

Redesigned and rebuilt the shared services cost-captureand allocation process

Large regional bank


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36 FS Viewpoint

Reengineered the nanceand risk infrastructures tomeet new business goals

Leading global investment bank

Issues The institution was undertaking a major initiative to realign its per ormancemanagement in rastructure with a new strategic business model. There werenumerous challenges, including a legacy in ormation delivery system and a highlycomplex business structure.

The client wished to enhance its management in ormation systems, establish a

rm-wide methodology to prior itize across competing requests or rm resources,and provide the ramework and t ransparency necessary to manage per ormance ona consistent basis across the institution.

Approach PwC worked with management, business users, and the nance organizationto de ne the new management reporting ramework that identi ed key areas oexecutive ocus, as well as the per ormance metrics to support that ocus. Thisinvolved the development o a business case, communication, and implementationo leading nancial institutio ns practices in the nance organization. To enhancedata quality and provide management with a better understanding o overall

nancial per ormance, the PwC team converted three legacy activity-based costing(ABC) models into a single model that improved cost attribution and increasedtransparency. Finally, PwC created a strategy or in ormation systems integrationthat ocused on in creasing data quality.

Benefts Cost-allocation enhancement improved data quality and IT e ciency, whichresulted in lower costs. As a result, management was able to view critical businessand nancial in ormation and a standardized set o per ormance metrics, whichenabled better decision making.

PwCs recommendations or the nance organization allowed the CFO and othernance executives to orm a strong business case and achieve buy-in rom other

members o senior management. This elevated the stature o the project withinthe organization.


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Designed new operating model for customer servicecontact centers that

lowered costs and enhancedcompetitivenessGlobal payments company

Issues The institution was acing increasing operating costs associated with customerservice contact centers as a result o limited technology investment and ballooningsalaries o long-tenured employees.

The contact centers had evolved over time, rom merely providing issuers withrequired services that they were unable to provide themselves, into entities that

provided value-added services as well. As a result, the contact centers could notaccurately report their impact on client pro tability to senior management.

Approach PwC de ned a best-cost operation model or the client, which assessed thekey value and cost drivers associated with labor, acilities, technology, andtelecommunication expenses or the customer contact centers. The PwC teamthen developed a tool using this data, which provided scenario analyses examininga range o strategic initiatives ranging rom complete insourcing to completeoutsourcing o technology solutions.

Benefts The PwC uture-state operation reduced bottom-line expenses, positioned thecontact centers to become more agile in the competitive landscape, and enabledthe capture o increased top-line revenue. The PwC-designed uture state also isexpected to deliver ongoing annual bene ts o US$6 million to US$10 million per

year, with a return on investment o 20% to 40%.


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38 FS Viewpoint

Issues The client identi ed its corporate governance, risk, and compliance-related (GRC)activities as areas to achieve cross- unctional cost e ciencies and e ectivenessopportunities. Management believed that, by employing greater cross- unctionalleverage and clari ying roles and responsibilities, it could achieve these goals.

Approach PwC per ormed proprietary diagnostics to assess the people, processes, andtechnology capabilities that were central to capture the costs or each o theGRC activities.

The costs associated with each unction were then captured and analyzed todetermine their attributions across the business units.

Combining these studies, PwC identi ed opportunities or greater e ciency anddeveloped action plans, timelines, and business cases or each initiative.

Benefts The institution identi ed US$15 million to US$30 million in potential annual costreductions and agreed to executive-level action plans and business cases orpursuing urther improvement opportunities.

Achieved cost reductionsthrough a targetedintegration of governance,

risk, and complianceoperationsTop-tenUS bank


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Issues The client was experiencing di culty in maintaining consistent and adequate anti-money laundering (AML) monitoring practices, and was concerned about potentialregulatory discipline due to insu cient monitoring lters and compromiseddata integrity.

A ter an internal study, the nancial institution believed that the costs o running

AML services in the United States were signi cantly higher than i the services wereplaced in Europe or Asia.

Approach The PwC response ocused on two areas: Improving the AML technology systems Restructuring and relocating the monitoring team

PwC replaced the single- lter AML process initially in place at the nancialinstitution with an eight-scenario lter, which greatly improved data qualityand e ciency.

Additionally, PwC helped migrate the banks AML process to two global monitoringhubs in Europe and Asia. The PwC team worked with the client at those locationsto reengineer the processes and procedures that woul d drive more sophisticated

AML monitoring.Benefts The client realized approximately 60% labor cost savings as a result o relocating

its AML processes.

The dual hub approach allowed the client to provide services to all its non-USbased locations, and reduced the cycle times required to respond to issues,eliminating many o managements regulatory ears.

Streamlined andrestructured an anti-money laundering monitoring

practice to improveef ciency and lower costsInvestment bank


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www.pwc.com/fsi

To have a deeper conversation, please contact:

John Garvey [email protected] +1 646 471 2422

Robert Ross [email protected] +1 312 298 2042

Takaaki Nakajima [email protected] +1 646 471 5657

2012: The Revenue Is Not Coming Back: Its Time to Manage CostsDi erently, PwC FS Viewpoint, May 2012. www.pwc.com/ si

2012 PricewaterhouseCoopers LLP, a Delaware limited liabilitypartnership. All rights reserved. PwC re ers to the US member rm, andmay sometimes re er to the PwC network. Each member rm is a separatelegal entity. Please see www.pwc.com/structure or urther details. Thiscontent is or general in ormation purposes only, and should not be usedas a substitute or consultation with pro essional advisors.

LA-12-0324 Viewpoint Revenue

We would also like to acknowledge the signi cant contribution of our externalconsultant Bob Lieberberg in the preparation of this document
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