Of all the things to ban, Britain’s Royal Air Force (RAF) banned marshmallows in the 1950s. Because the air trapped within a marshmallow expands at high altitudes, the size of a marshmallow significantly increases — something British pilots discovered after bringing marshmallow teacakes on high-altitude flights to amuse themselves. The fun came to an end, however, when unwrapped marshmallow teacakes forgotten inside the aircraft exploded when the cabin depressurized. Just as reducing the pressure on a marshmallow too drastically can lead to an explosion, cutting costs too significantly within a financial institution can negatively impact customer satisfaction.Trimming the Fat Amidst rising inflation, cost management has become increasingly important for community financial institutions (CFIs). While cost management initiatives can be a good way for CFIs to enhance the overall profitability of their organizations, if not done strategically, they can do more harm than good. According to a recent banking cost transformation survey from KPMG, 82% of organizations found it difficult to get the cultural buy-in necessary for sustainable cost reductions within their institution, with 90% of efforts unable to deliver successful outcomes. This occurs, the survey found, when cost-reduction goals don’t fit with the financial institution’s cultural mindset or wider objectives. Meanwhile, with existing improvements in financial institutions’ cost-to-income ratios (CIR) proving insufficient, most organizations will need to deliver additional cost efficiencies of around 10% over the next 12 months and up to 20%-30% over the next two to three years, according to KPMG. In many cases, cost-cutting initiatives translate to job cuts and layoffs. Yet, cutting staff is not necessarily the best move; there can be more effective ways for financial institutions to rein in costs. On top of looking for costs that can be eliminated, CFIs should also analyze the value that can be generated through the services they provide to customers. As CFIs seek to enhance cost management efforts, here are a few things to keep in mind:
- Conduct an internal business assessment. Before implementing cost-cutting measures, conduct a comprehensive review of your business and assess what is and isn’t lending value to your CFI’s overall productivity. It is equally important to consider how any cuts could negatively impact both employees and the customer experience. For example, adding new technologies may provide additional efficiencies, but if such additions are made without adequate upskilling or training, they may not achieve the desired results.
- Seek third-party provider assistance. An outside perspective can be a good way for organizations to get a comprehensive picture of their needs. Outsourcing is also becoming increasingly popular, so it can be well worth looking to see if there are any time-consuming tasks or procedures that can be outsourced to third-party experts to free up core employees for more high-impact projects.
- Institute regular initiative reviews. For cost management initiatives to be successful, they need to be sustainable and must continuously be evaluated and adapted to changing conditions. Any existing investment plans should be reviewed to ensure that they match your CFI’s business and digital needs.
- Cut costs thoughtfully. When measuring costs, it is important to look at an entire value chain. Cost-cutting measures made in haste could ultimately lead to difficulties or problems down the road, or elicit unintended expenses.
- Consider artificial intelligence (AI) support. Investments in relationship managers and contact centers should be reviewed to discover what functions can more effectively be paired with AI support.
- Automate where possible. Cost management efforts should examine operational and digital maturity to identify any possibilities for switching to lower-cost options and areas where automation can lower processing costs.
- Audit your contracts. Don’t overlook potential savings that may be hidden within procurement costs. Conducting an internal audit of outside subscriptions and services your organization pays for can lead to significant savings. It is not uncommon for employees to pay for duplicate subscriptions because they are unaware that a colleague has already done so. Similarly, since many outside services and subscriptions auto-renew, look out for any hidden cost increases that can be eliminated or negotiated down. You might even consult a third party to help evaluate which of your contracted services include unnecessary costs.
Cost-cutting measures that do not take a comprehensive approach and include the input and support of everyone within an organization from management down are unlikely to succeed. As CFIs turn to cost management efforts to boost revenue, it is imperative to look at how such measures will impact both employees and the customer experience.
