Kelley Mavros is a partner in Strategy&’s Digital Business & Technology practice with expertise in the financial services industry. Her work includes lean operating model, cost transformations, IT effectiveness and post-merger integration programs. The successes of today’s financial services firms require taking on a more strategic approach to costs. In this post, sponsored by Strategy&, Kelley Mavros talks about how companies can adopt a Fit for Growth approach to cut costs and grow stronger.
Question: What is the concept behind the “Fit for Growth” strategy and how can it help financial-services firms in particular?
Answer: The financial-services industry faces a unique set of challenges in the wake of the financial crisis. New regulations and capital adequacy requirements, changing client behavior, the rapid advance of digitization, and a fluid competitive landscape have permanently altered the rules of the game and raised the cost of doing business. In short, there’s a lot of pressure to remain profitable in an environment where a lot of obstacles stand in the way of doing so. Making periodic sweeping cost cuts, the common reaction, has proven inadequate and often counterproductive, frequently creating a longer-term growth problem. To return to a profitable growth trajectory, banks need a different approach, balancing cost cutting in non-vital and non-differentiating areas of the company with investment in distinctive capabilities. It may seem counterintuitive to actually increase spend in some areas while making cuts in others, but doing so will transform the way the firm operates, reducing costs while still creating the capacity to expand business and attract new customers. At Strategy&, we call this the Fit for Growth* approach.
Q: How can banks and other financial-services firms create value in today’s environment?
A: Creating value boils down to being better than anyone else at a couple of things that truly matter to customers. This requires investing more in the things that fuel your competitive edge and less in the things that don’t. Costs are no longer inescapable problems; they are pro-growth choices. Based on our experience with numerous financial institutions, we have found that successful Fit for Growth programs can yield savings in the range of 25 to 30 percent. These choices start at the top of the organization, in three stages:
- Define the strategy and capabilities: How are you creating value for your customers, and what are the three to six differentiating capabilities that work together as a system, setting your company apart from rivals, and giving it the “right to win?” Will you be a universal bank, or a local market specialist? Will you offer “high-touch” client service, or achieve scale through standard offerings? Will you provide platforms or data as part of your product portfolio? All of these models can be successful, and identifying your way to play and your differentiating capabilities leads you to your unique “right to win.”
- Ruthlessly allocate resources. Use a disciplined resource allocation process that ensures adequate funding for high-growth, core activities. Manage spending strategically, making rigorous trade-offs based on cost transparency and a deep understanding of how you make money.
- Evolve your organizational design: Align your organizational structure based on your firm’s chosen way to play. The outcome of this is an operating model blueprint that describes in detail how those strategic choices —what the bank does, where it does it, and how it does it—should be executed.
Q: How can a strategic approach to costs help with growth?
A: Companies willing to prepare for growth through implementing a more deliberate, lean, fit-for-purpose operating model can gain advantage over competitors that do not use a strategic approach.
Our approach is the corporate equivalent of a fitness regimen that focuses, in effect, on building muscle—developing the capabilities that make the company distinct—while cutting fat. By contrast, across-the-board cost reductions are the corporate equivalent of crash diets. They are ineffective because they do not last, and at worst they can cut into productive muscle and increase risk.
The secret to fitness is to never return to old habits and to instead follow an ethic of continuous improvement. Companies that are ready for growth commit to a lean mind-set and are always honing their capabilities and cost structure, while also reorienting for growth. Most importantly, they do all this with a watchful eye on their unique value proposition and the distinctive capabilities that will allow them to grow.
Q: What are some of the opportunities to create more value for customers?
A: Creating value for customers is the cornerstone of each phase of the Fit for Growth agenda. By defining the company’s “right to win,” banks and financial-services firms zero in on perfecting the products and services that align with their own distinctive capabilities, and customers benefit from having access to products and services crafted specifically for them.
Consider, for example, the pressures of regulatory reporting, both for your own firm and for your customers. Then consider the amount of data you may hold about and for your customers. What if you could integrate that data? What if you could provide risk and regulatory reporting and analytics on that data? As banks and financial-services firms improve their own capabilities, they can identify new ways to offer more to their customers.
In addition, by building a culture of continuous improvement, banks and financial-services firms institutionalize customer-centric adaptability across the entire firm to permeate everything the company does. And in turn, by reorganizing their operating models, financial-services firms reinvent their processes in support of the long-term goal: a superior customer experience that will drive loyalty and growth.
Q: You have developed a tool that allows companies to assess how ready they are to grow. How does the Fit for Growth Index profiler work?
A: Our Fit for Growth Index profiler is a five-minute tool that provides a customized, quantitative measure of a company’s aptitude across the three stages of the program. The profiler allows you to assess your firm’s readiness for growth and then compares your company to players from across your industry and visualizes the payoff from managing cost in a more strategic way. We also provide tailored recommendations for preparing your company for growth based on your unique starting point. It’s a quick and easy way of determining your company’s “fitness” level and seeing how it compares to that of other financial-services firms, highlighting key areas of strength and those that might need improvement. More on the Fit for Growth Index profiler can be found here.
*Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States.
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