Embedding productivity in financial institutions: Key insights from KPMG study

Following the 2008 economic crisis, many financial services companies worked relentlessly to cut costs. But today, many of those same costs are creeping back up again. Like a weight watcher on a crash diet, these companies need to realise that sustainable lifestyle adjustments, rather than extraordinary efforts, are the only way to make changes that endure.

According to a KPMG study, Embedding Productivity Disciplines: Why financial services firms needs a lifestyle change that lasts shows that financial institution executives need to transform their approach to cost-efficiency by taking action on two fronts. First, they need to drive ever higher productivity through excellence in continuous improvement. Second, they need to focus on the levers and elements of their business that can boost revenue by delivering the right mix of higher margins and reduced capital intensity.

“This may seem daunting; but there is no realistic alternative,” says Martin Blake, partner and New South Wales Chairman, KPMG in Australia. “To succeed, those organisations that do not have a system for doing more with less year after year will have to deliver much higher revenue growth than those that do – and such growth may be unachievable. In a low-growth, capital-constrained business environment, continuous improvement in productivity is not an option, it is a strategic necessity.”

KPMG’s research reveals that achieving success in this area depends on an organisation’s capabilities in the following critical productivity disciplines:

Productivity strategy: The organisation’s corporate strategy needs treat productivity broadly, as a key source of competitive advantage and revenue generation, rather than as a narrow set of cost-cutting exercises.

Transparency: Organisations need to ensure their people understand what drives revenue and costs and embed these drivers in their performance management and management information systems.

Customer value creation: In KPMG’s experience, good customer service is actually 25 percent cheaper to deliver than poor customer service. Management and staff must understand what the customer perceives as value so they can satisfy customer needs consistently and eliminate non-value-adding, wasteful activities.

Continuous improvement: Most cost reduction programs fall short because they do not reduce the amount of work required per unit of output over the longer term, so costs tend to grow back over time. In our experience, leading organisations take a continuous improvement approach to day-to-day operations through a combination of sustained executive focus and support for team-led change.

Investment management: Many financial institutions allocate internal investment through a divisional, bottom-up bidding process. Ideally, however, these decisions should be based on, and aimed at, delivering the desired future operating model. KPMG’s study found that leading organisations use their understanding of revenue and cost drivers to create a line of sight between strategy, investment spend and benefits across the organisation.

Tools and techniques: The organisation needs to establish mechanisms, such as internal and external benchmarking, to help its people understand value, gain insight into core processes, and drive learning and improvement cycles.

Culture: The success of any productivity strategy depends on the trust and willing engagement of staff. People in the organisation need to believe that they can make a difference and that they will be supported in doing so.

Using these productivity disciplines, KPMG’s Financial Services team has developed a broad ranging framework for assessing current capabilities and guiding cultural change initiatives in financial institutions.

“Our research suggests it is time for the financial services industry to move beyond one-off initiatives and adopt a lifestyle change that lasts,” says Adrian Harkin, partner with KPMG in the UK. “This means taking a leaner, more customer-focused approach to doing business in which learning and continuous improvement is the norm, adding customer value is everyone’s primary goal and tight cost control works together with innovative revenue generation to improve productivity.”