The financial services industry is under pressure, with most companies suffering unsustainable cost–income ratios. PwC’s 2019 report, The productivity agenda: moving beyond cost reduction in financial services, shows that banks are struggling with costs on all fronts.
Much of the response from the industry has been in line with traditional cost cutting initiatives. Companies have focused on reducing expenses and personnel, as well as automating and offshoring while introducing new technology. Discretionary spending is also on the decrease, resulting in suppliers also feeling the pinch.
PwC’s 2019 banks report, Striving for growth in a challenging environment - Major banks analysis, notes that, beyond cost discipline, there will be relentless focus on optimising operational efficiencies, as banks continue to rationalise their IT architectures, standardise and simplify core banking operations and reduce operational complexity. Advancements in robotic process automation will have an increasing role to play in process optimisation.
Since PwC began its major South African banks analysis report nine years ago, the combined cost-to- income ratio has remained in the 54%-56% range, illustrating the structural challenge in moving the needle on this important ratio. This highlights the balance the banks need to strike between executing on strategies while managing overall group costs.
“Traditional cost-reduction measures on their own are not going to cut it anymore, and they are no longer sustainable as the only option in the long run. Companies need to find other ways of reducing costs. They must see if they can get the best out of the resources they already have. They need to improve productivity within their workforce, and look at the key drivers of their overall productivity measures,” says Luizet Ruzow, Accelerated Business Transformation capability Lead for PwC South Africa.
Although ROE for South African banks stands at 18%, it is still lower on a combined basis for many traditional global banks since the 2008 financial crisis.
Traditional banks are also faced with new challenges as the sector moves into a future shaped by the entry of digital banks with unprecedented levels of innovation and the agility to change quickly. To face this challenge, traditional banks have to develop clear innovation strategies and embed a culture that supports agility and measured risk-taking to ensure they build business models responsive to new-age challenges.
“Things have evolved over the years, while in the 1990s everything used to be about IQ, the 2000s saw a shift to EQ, where it was required for companies to apply emotional intelligence for better stakeholder and client management. Now the buzzword is digital IQ, which not only refers to technical aspects, but soft aspects such as adaptability, ability to influence, and emotional intelligence. In South Africa large corporations are particularly sensitive to the need for retaining and reskilling staff.
“The way PwC addresses Digital IQ is through our business and technology application experience, as well as our embracing enterprise agility and its BXT methodology we use to help clients build modern versions of their companies. Our experience has shown that centres of excellence provide the optimal structure for deploying these technologies due to a reduced number of tools, technologies and methodologies, centralised insights and the end-to-end modelling of processes with ‘what if’ analyses to ensure optimal placement of digital labour.
“PwC recently modelled the end-to-end credit process of a banking client, leveraging the client’s own information, including employee digital footprints, and performed ‘what if’ analyses to target digital labour investment to areas with the most potential upside. The outcome was a 20 to 30% increased capacity across teams as well as a decrease in lending lead times by more than 30 days from application to client draw down” says Ruzow.
The industry has nearly exhausted its arsenal of conventional cost-reduction, with further cutbacks in many businesses likely to be counterproductive to long-term profitability and sustainability. This makes it necessary to acquire the skills and tools needed to boost productivity.
“Bringing in people with the right technical and soft skills is a must. However there should always be room for upskilling to keep your workforce performance at optimum levels. Digital skills, and the ability to implement robotic process automation in areas where there are repetitive tasks, are an imperative for surviving in a rapidly digitising world. This will lead to more productivity within the same time that would have been spent by humans performing the same tasks, and augment their existing skills to make them more effective and efficient in doing their jobs.
"PwC utilises an award winning operational excellence approach, with a specific focus on a sustainable high-performing, people-centric, framework focused on the customer and empowering ownership across the organisation. Cumulatively, in the past five years, we have helped over 75 clients across 18 countries - realising over R10bn of sustainable savings, while in South Africa we have been working with financial services clients for whom we delivered over R1.5bn improvements in the past 24 months,” says Ruzow.
Embracing the platform economy can also have huge productivity benefits as it entails using the platform but never owning the primary physical assets used in conducting your business.
The Productivity agenda: moving beyond cost reduction in financial services report highlights how platforms such as RedesignMe (product design) and uTest (software testing) enable institutions to solve important business challenges by engaging not only employees but also partners, customers and third parties in developing software, creating new products and services, and improving process efficiency. These platforms can run challenges that tap the collective brainpower and resources of a crowd, driven by a sense of competition to develop the best response.
“Organisations that take this approach are more successful as their employees perform 15 to 20% of the work of a typical institution within five years. This leads to significant cost-savings as one of the biggest things companies struggle with is retaining talent, with a normal churn rate generally between two to three years,”
Sustainable productivity improvement requires technology and humans to work together in a changed relationship, where machines take over routine manual tasks but also assist humans in better executing their roles.
To make this a success, there must be buy-in from the top. Those who will benefit most will take productivity seriously and not look at cutting costs to meet short-term earnings goals. On top of all this, our view is that the creation of the position of chief productivity officer will certainly help with driving the productivity agenda for the industry. This will give the issue much needed focus as we move into a future of unprecedented need for productivity improvement and increased operational efficiency.
Partner, PwC South Africa
Tel: +27 (0) 11 797 5544