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Improving Efficiency

The new high ground for banks

Financial services firms are facing a much tougher operating environment as a result of the credit crisis. Higher funding costs, increased defaults, and limited opportunities for topline growth are all contributing to a more challenging situation for the industry. Combined with the likelihood of additional compliance obligations, financial institutions are facing a level of difficulty they have not seen for many years. As a result, many firms are being forced to place more emphasis on reducing costs.

Improving efficiency has long been a challenge for the financial services industry, but cost management is not only about reducing expenses. It is about generating more revenue per unit of cost. U.S. banks vary widely in their commitment to cost management, and their commitment tends to be more cyclical than sustaining.

The benefits of a stronger focus on efficiency can be significant. According to our research, banks that generally maintained a consistent approach to efficiency improvement also enjoyed superior stock-price growth in addition to being better prepared to organically fund investments. Furthermore, banks that effectively manage their operating costs will likely have more room to maneuver during the current credit crisis than banks that do not. It is not just revenue that counts on Wall Street. This may be particularly important for banks struggling to rebuild capital positions damaged by the crisis. In this environment, any contribution to the bottom line is important.

With this in mind, many banks have announced cost-reduction programs to help improve damaged margins. However, how successful will these programs be?

In down markets, the temptation is often to resort to short-term measures and reduce costs quickly wherever possible. But successful cost management requires a long-term and consistent focus across cycles instead of reactive responses to specific business cycles, such as the current downturn.

For banks to exceed their peers in improving efficiency, they have to be willing to implement a long-term, enterprise-wide approach that will require fundamental, and for some, cultural change. They want to go beyond simply reducing budgets and improving processes, cutting back on external contractors, and freezing headcount and expenses. Instead, they try to embed a commitment to efficiency into the firmís DNA, perhaps even making consistent quality and continuous performance improvements part of the enterprise identity.

This report addresses the importance of a sustained focus on cost management, particularly at the present time, and provides suggestions on ways to start the process of continuous improvement.

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