The cost of cost management

13 Oct 2016

The cost of cost management

Stagnant revenue growth, intense competition in niche markets and regulatory pressures are ravaging profits in the Financial Services sector. This has been exacerbated by the earnings squeeze on UK banks from record-low interest rates, expected to remain in place following the vote to leave the EU.

In this negative or low growth environment, cost reduction programmes are essential to maintaining profits at banks and building societies. It’s little surprise that the cost agenda has very publicly muscled its way to the top of CEO agendas.  

Firms must find a balance between paralysing indecision and undue haste. How do we sustainably reduce costs while maintaining an ability to grow?

The process of simplification in businesses is not technically in conflict with anything. Making systems and processes more efficient and de-layering management may be conducted in any type of market and can always be viewed through a positive lens.

But adhering to unyielding and accelerated cost targets, with an obvious increase in staff redundancies, is a different proposition altogether. This has the potential to undermine even the strongest company culture. The looming threat of mass redundancies has a hugely detrimental impact on employee motivation.

Job security fatigue

Wave-upon-wave of revised cost reduction projects, with no clear end in sight, causes staff ‘fatigue’. Constant worry about job security is exhausting.

There is also a subtler, almost subconscious effect on staff morale. Employees in many banks are losing affinity with the company brand. In part, this can be ascribed to the lack of short-term growth ambition at many firms. Shortage of dynamism triggers disaffection. Additionally, the broader social and political ramifications of the financial crisis have had a dispiriting effect, with banks often unfairly cast as the grasping villains of the piece.

Outsourcing remains a tremendous way to save money, but it has impacted talent pipelines within functions. This is a big concern in finance specifically, often the breeding ground for leaders, where people have been relocated from headquarters to low cost ‘centres’ in Central Europe and India.

Factor in the diminishing brand ‘pull’ of banks to graduates and it becomes clear that CFOs face an uphill struggle with talent pipelines.

Centralisation has hindered succession planning, vital to retaining the best employees. When business units are merged, we tend to see a marked reduction in levels of strategic autonomy in certain finance positions, with fewer visible opportunities to navigate up through company hierarchies. The prospect of marginalised roles and dwindling opportunities has seen the most prestigious institutions lose staff to small, UK-centric challenger firms.

What then can be done to mitigate the human impact? A lot, as it happens.

Relevance and consistency

For cost reduction programmes to be embraced, there must be unwavering Board support and clear messaging. In the past, management teams have mistakenly portrayed transformation as a detached corporate project, without explicitly establishing its crucial role in delivering future success.

There should be an almost draconian pursuit of consistency in all departments. Otherwise teams will find reasons why cost saving opportunities would be better confined to other areas of the bank.

A suitable candidate should be selected to orchestrate and drive the project. They will be capable of interacting at Board level and be able to knit the cost control function together with the group’s investment strategy. This is no mean feat. We’ve found very few candidates capable of executing such a politically challenging and diverse role.

CFOs and their direct reports have a huge part to play in navigating through turbulent waters. It’s vital to empathise with the needs of employees. Involving people in complex project work and decision making is an easy and consequence-free solution that binds teams together and enhances role satisfaction.

Finance professionals are motivated by the immediacy of their daily challenges, as well as longer-term aspirations. On that note, succession planning and broader talent management becomes hugely important.

In an environment of curtailed opportunities, the most demanding and aspirational staff should be identified earlier and given clear road-maps as to their future. If they feel invested in and supported with their goals, they are infinitely less likely to seek new pastures.

Openness and feedback

Managers need to create a fully transparent, open culture in their teams. Too many CFOs distance themselves from their workforce, creating further anxiety. Frequent, positive feedback (one-on-ones, ‘Town Halls’, social events etc.) within an enjoyable, team-oriented environment makes a tremendous difference to employees' sense of being valued.  

Firms must seriously consider the sophistication and abilities of their recruitment partners. More so now than ever before. Accurately screening softer skills of candidates, such as emotional intelligence and the ability to motivate, attract and retain staff are as important as technical attributes. Project management skills, risk appetite and genuine joie de vivre are paramount. Ironically, recruiting world-class cost management professionals is priceless.

This is a challenging period in the economic cycle. However, banks and insurance companies will inevitably bounce back financially and socioeconomically. In the meantime, cost management must be viewed through a human lens. Otherwise, talented employees start feeling like an expendable commodity.