NEEDHAM, MA, July 27, 2005 - According to new research from TowerGroup, many global financial services institutions lag the industry's leaders in operational efficiency by as much as 30%. A review of a select group of top diversified global financial institutions found that these institutions averaged around 60 cents in cost to produce $1.00 of revenue. This is compared with the industry's top performers, who spend just over 40 cents for that same $1.00 of revenue.
"Banks, securities firms and insurance companies have tended to rush into cost cutting, as a tactical response to lagging efficiency ratios," said Guillermo Kopp, vice president of the Cross-Industry research practice at TowerGroup and author of the report. "Panicked about meeting expense reduction targets, institutions spend too little time figuring out where and how to cut cost, quickly reducing their opportunities to eliminate redundant expenses and sacrificing long-term transformation for short-term goals."
Kopp added, "Now that business is rebounding across most financial services sectors, many institutions are finding that their operational efficiency is burdened by convoluted business processes, fragment IT systems and intricate legacy interfaces."
Highlights of the research include:
- A fragmented approach to technology on the part of a financial institution can bring additional hidden costs beyond simply an inefficient operation.
Among the most potentially damaging of these are flaws in data integrity and information security.
- Careful evaluation of a financial institution's expense structure can distinguish real improvements from makeshift cost-cutting, as well as effective transformation efforts from added overhead.
- Some institutions are starting to deploy holistic, multilayer tools to help transform their legacy business functions, often through modular implementations. The formulation of an enterprise business and technology architecture is critical to helping institutions achieve a gradual and manageable implementation of these solutions "modules," which often proceed down three strategic paths: data integration; enterprise reporting; and transaction processing.
- Optimized business processes in selected vertical functions like the above can typically reduce costs by 30%. For back-office areas that operate like a labor-intensive "service factory," the savings can be even higher.
"Since everyone is concerned with efficiency ratios, CIOs must come to grips with the fact that their case for transforming inadequate systems is more than a technology case alone," added Kopp. "They must articulate a broader business case by demonstrating how technology transformations can be 'syndicated' across an enterprise, creating new functional value. For example, holistic risk data for a specific customer across different product areas should support the compliance reporting process, but it can also help the institution produce more timely and more competitive pricing for that customer - thereby driving revenue."