Productivity is a strategic imperative for Australia's banks

Productivity is imperative for Australia's banks

Australia's majors have demonstrated a strong track record of delivering cost savings and have often ranked highly in cost-to-income ratio comparisons with international banking peers. This has come from a combination of robust levels of income growth seen over previous years, as well as disciplined management of costs, process improvement and outsourcing. At the same time, banks have been increasing their cost per FTE consistently with limited headcount reductions.

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However, Australian banking now faces the greatest array of challenges in over 30 years. While the GFC dented customer confidence and returns, the industry is now facing a barrage of challenges including 'lower for longer' levels of revenue growth and ROE, omnibus regulatory change, disruption and disintermediation, heightened customer demand for better value products and services, and growing community concerns over the industry's conduct.

We strongly support the need to continue to invest in the medium term to address these demands, but it is clear that a radically different approach to productivity – akin to the sorts of structural transformation last seen in the 1990s – is required to release resources, create the financial capacity to invest in transformation and deliver acceptable financial results.

Some of the drivers of the underlying structural cost problems include:

  • Staffing and operating models. Staffing levels and salaries have grown consistently over time with low spans of control, and a skew to non-customer facing roles; particularly in head office and supervisory functions
  • The cost of change is prohibitive. Technology change is hamstrung by relying on traditional approaches to project identification, mobilisation and delivery
  • The regulatory and compliance burden continues to grow unfettered
  • Reliance on third party origination results in sub scale and inefficient physical distribution channels and service
  • Inconsistent use of internal and external services and change delivery (sourcing vs. internal capability vs. specialisation vs. managed services) adds complexity, bureaucracy and unnecessary cost burdens.

So how can banks rethink their approach to productivity to deliver positive material change in their cost bases?

Most importantly, delivery of sustainable productivity requires a mind-set change in the way it is managed. Productivity must become a structured core element of banks’ strategic agendas and be delivered in agile bursts – not part of a traditional project-type delivery structure. Leaders must embrace cost saving as a way of working, be bold and not be afraid to challenge the status quo.

Individual leaders must take personal accountability, effectively resource the change and improvement activities required over a clear time horizon, measure success and hold staff accountable for delivering successful outcomes.

Consistent, organisation-wide communication is a critical element of success to build a cost-conscious mindset and encourage staff to think commercially about how they spend money directly and use resources indirectly.

Typically, successful banks are pursuing cost productivity in a consistent way:

  • Simplify the operating model by deploying customer-centric approach with simplified, empowered businesses oriented around customer segments managed by a small corporate core, flatter management layers, wider spans of control and a culture of personal accountability
  • Channel optimisation, including providing options for sales and service, removing cash and waste and transforming sales and service in branches, contact centres, and through partners
  • Customer coverage refocused on sectors and segments that deliver value
  • Revert back to core by exiting non-core businesses, products and markets
  • Develop strategic outsourcing/offshoring propositions and partnerships to leverage scale and innovations including robotics
  • Obsess about digitisation and simplification of end-to-end processes and products
  • Adopt a “lean” approach to change with new ways of working and partnering externally
  • Drive a disciplined cost management using zero-based design for all BAU/run costs
  • Transform technology through infrastructure, change delivery and system/platform rationalisation.

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