Deloitte Research

Fit for the

FUTURE
Building competitive advantage
through strategic cost reduction

A financial services industry study by Deloitte Research

For too many firms, cutting costs is a management priority when
business conditions are weak, only to be forgotten when economic
growth resumes. But continually increasing operating efficiency is
fundamental to success in both good times and bad. In this report,
Deloitte Research presents the latest approaches to building
competitive advantage by reducing costs throughout every aspect of
the enterprise.
CONTENTS
Executive Summary .............................................................. 2
Introduction ........................................................................ 5
A Strategic Approach Required .............................................. 7
Crafting a Cost Reduction Program ........................................ 8
Building Blocks for a Cost Reduction Program ....................... 14
Tomorrow’s Agenda ............................................................ 24
About Deloitte Research ...................................................... 27
 Executive Summary A Strategic Approach Required. To reap these benefits,

Financial services institutions need to adopt a strategic approach financial services firms need to take a strategic approach to cost

to cost reduction that generates near-term cost savings while at reduction with the following five characteristics:

the same time builds a more efficient operating model over the 1. Linked to Strategic Goals. The first step is to reexamine a firm’s

long term. Firms that use cost reduction to create a leaner, more business strategy to ensure that it remains relevant to changing

efficient organization will not only survive the current difficult market conditions. A strategic approach then carefully aligns

economic conditions, but will also prosper throughout all phases cost reduction initiatives with the reconfirmed strategy, rather

of the business cycle. than relying on across-the-board reductions that could

The economic downturn that hit the United States and other undermine business objectives.

countries in 2001 has made cost reduction the management topic 2. Comprehensive. Instead of focusing only on staff reductions,

of the day. Financial services firms have moved aggressively to strategic cost reduction analyzes the entire organization for

cut expenses, including widespread layoffs. But while reduced cost-cutting opportunities.

business volumes require fewer employees, too often firms fail to 3. Sustainable Cost Savings. A strategic approach increases

take steps to permanently increase their operating efficiency. efficiency by rethinking both what the firm does and how it

Yet in both good economic times and bad, firms that does it.

successfully increase their operating efficiency are rewarded by 4. Phased Implementation. Initiatives include both quick wins

investors. For example, during the period of strong economic and longer-term measures that are more difficult to implement

growth from 1997 to 2000, the large banks with the best efficiency but offer greater cost savings.

ratios saw their share prices rise by an average annual rate of 5. Senior Management Commitment. An essential ingredient is

13.6 percent, compared to an average annual share price increase the full commitment of senior management, which can best

of 9.6 percent for the 100 largest banks. However, the large banks be demonstrated by appointing a prominent senior executive
2
that showed the greatest improvement in efficiency fared even to lead the effort.

better, with an average annual share price increase of 19.2 percent

over the period. Firms that continue to improve their efficiency
are rewarded by investors with higher share prices.

Crafting a Cost Reduction Program. A five-step
methodology can help firms design a strategic cost reduction
program that will create long-term gains in efficiency:
1. Reexamine Strategy. A firm first needs to review its business
strategy to ensure it remains relevant and then clarify its
strategic goals before designing a cost reduction program to
complement them.
2. Establish the Cost Base. A cost reduction program is only as
good as the data on which it is based. Firms need to gather
and analyze detailed data on their current costs, as well as
understand the history of management decisions that led to
the current cost structure.
3. Set Cost Reduction Targets. Firms can establish the goals for
a cost reduction initiative by analyzing the enterprise from
three perspectives: industry best practice, an internal
assessment of cost reduction opportunities, and the level of
cost reduction that is assumed in the current share price.
4. Identify Potential Initiatives. A variety of techniques can be
used to develop a list of potential cost reduction initiatives,
including tapping management knowledge, identifying large
areas of cost and their cost drivers, comparing the level of costs
across the organization, and examining best practices.
5. Prioritize Initiatives. Finally, a portfolio of short-term and
long-term initiatives must be created and prioritized using
criteria such as the investment required, potential benefit,
speed of implementation, and risks involved.
Deloitte Research – Strategic Cost Reduction
Strategic cost reduction is complex and requires a significant
commitment to be successful. Before undertaking a strategic cost
reduction program, a firm must ask itself some pointed questions:
1. The Devil is in the Details: Does the organization have—or is
it prepared to develop—accurate, detailed cost data on which
to design and defend a strategic cost reduction program?
2. Best Practice: How efficient are individual business units when
compared both internally and to leading competitors?
3. Investor Criteria: What are investor expectations regarding the
size and speed of cost reductions?
4. Gauging Appetites: How urgent is the need to reduce costs?
Does the organization have the appetite for the fundamental
changes required to increase efficiency?
5. Total Commitment: Is senior management fully committed to
the effort and ready to stay actively involved? What methods
and measures are in place to monitor progress? Are these
criteria embedded in the organization and linked to employee
evaluation and compensation systems?
Firms that are prepared to make the commitment to a strategic
cost reduction program can not only generate short-term cost
savings, they also build long-term competitive advantage by
creating leaner, more efficient operations. Financial services firms
that integrate an ongoing search for increased efficiency into their
business cultures will be those that emerge as leaders in the years
ahead.
3
 BUILDING BLOCKS FOR COST REDUCTION
POTENTIAL COST
CATEGORY SAMPLE INITIATIVES REDUCTION* COMMENTS
Human Resources ■ Pay severance benefits from qualified pension 5–10% ■ Single largest expense category, often 50 percent
plan of total expenses
■ Consolidate pension and benefit programs ■ Reductions of 25 percent in HR administrative
■ Link compensation more closely to expenses are possible
performance ■ Improved HR practices can also drive desired
business outcomes

Occupancy Costs ■ Renegotiate leases 5–20% ■ Difficult to achieve short-term savings due to lease
■ Contest tax assessments contracts
■ Seek government incentives ■ Savings of up to 20 percent are possible, but only if
aggressively pursued; three to five years
required for full implementation

Travel and ■ Revise policies and procedures 5–10% ■ Additional short-term savings can be achieved
Entertainment ■ Improve monitoring and enforcement quickly (30 percent or more), but are not
of compliance sustainable

Advertising ■ Revise policies and procedures 5–10% ■ Although larger cost reductions are possible, these
and Marketing ■ Improve monitoring of return on spend are not sustainable without long-term damage
■ Firms that maintain their level of marketing activity
can gain market share
Tax ■ Tax-efficient structuring of financing, leasing, NA ■ Cost reductions can be substantial, although size
research and development, and corporate of savings varies widely depending on the
restructuring characteristics of individual firms and country
tax regimes
Outsourcing ■ Outsourcing aspects of major business Up to 10% ■ Shift to lower-cost provider, who performs function
processes as core competency
■ Strategic partnerships with vendors ■ Replace fixed costs with variable costs
■ Management time and resources freed to focus on
core business activities
■ Opportunity to generate additional revenue from
strategic partnerships with vendors
4 ■ Outsourcing not a cure for inefficient operations
Strategic Sourcing ■ Create global procurement 15–25% ■ Global purchasing power leveraged
■ Create uniform standards ■ Increased price transparency
■ Reduce number of suppliers ■ Improved oversight to ensure that appropriate
■ Improve monitoring of contract compliance goods and services are purchased and at
competitive cost

Functional ■ Shared-service centers to achieve 10–20% ■ Multiple operations centers resulting from
Consolidation economies of scale acquisitions have often not been integrated
■ Redundant IT systems can be eliminated and
headcount reduced
■ Service centers can be located where real estate
and labor are less expensive

Automation ■ Straight through processing 15–20% ■ Eliminating manual processes can reduce
■ Billing and collection headcount
■ Procurement ■ Reduced interest expense on outstanding
receivables
■ T&E administration
■ Automated processes are less expensive to
administer and produce fewer processing errors
Reengineering ■ Elimination of bottlenecks, redundancies, 25–30% ■ Zero-based evaluation of business processes can
and unnecessary handoffs result in significant reductions in headcount
■ Streamlined processes must not weaken risk
management controls
*Sustainable cost reduction that can be achieved by typical firms consistent with long-term growth. Depending on their specific circumstances, individual firms may achieve either
higher or lower cost savings than these estimates. Note: These cost reduction estimates are not cumulative.
SOURCE: DELOITTE RESEARCH
 Deloitte Research – Strategic Cost Reduction
Introduction ■ e-Commerce. The Internet has driven down margins by
giving consumers the ability to easily compare offerings
Increasing efficiency should be a cornerstone of corporate strategy
from multiple providers. The motto of LendingTree, which
whether the economy is expanding or contracting, yet most
allows consumers to instantly solicit quotes from its 3,600
financial services firms have only focused on cost reduction in
participating U.S. financial institutions, sums up the impact
response to the economic slowdown that began in many countries
of e-commerce: When banks compete, you win.
in 2001. Firms in sectors with declining business activity and
■ Increased Competition. Today, banks, securities firms, and
revenues, such as investment banking, have announced deep cuts
insurance companies have entered each other’s markets as
in personnel and other expense items to reflect reduced business
traditional industry lines have faded. Meanwhile, financial
volumes.While needed, these volume-related reductions don’t build
services firms are now competing as well with
sustainable competitive advantage by increasing productivity.
nontraditional competitors, such as retail, industrial, and
Often, they can instead be handicaps. When business picks up,
software firms.
headcount and expenses rise once again, and firms must bear the
These long-term trends have all tended to reduce profit margins
cost of rehiring and retraining staff.
for financial services firms, making operating efficiency an
This phenomenon is most pronounced in the securities
essential ingredient to generating superior shareholder returns.
industry, which is dependent on volatile revenues from capital
markets. Longer-term cost reduction programs are more common
Efficiency Creates Shareholder Value
among commercial banks and insurance companies, which attempt
We analyzed the performance from 1997 to 2000 of the 100
to improve their returns through cost-cutting to compensate for
largest banks in the world as measured by assets. During this
their more stable, but slower-growing, revenues.There are instances
period, the average compounded annual growth rate for their
of drastic cost reduction programs even in these parts of the
share prices was 9.6 percent, while their average efficiency ratio
industry, however, such as the estimated 10 percent reduction in
was just under 70 percent. (See Exhibit 1.)
workforce at Germany’s big banks in late 2001.
Today, all financial services firms are finding that several long- EXHIBIT 1. EFFICIENCY CREATES SHAREHOLDER VALUE
AVERAGE ANNUAL PERCENT CHANGE IN SHARE PRICE, 1997–2000
term trends will continue to place pressure on profits even when
19.2
the economy is growing well:
13.6
■ Commoditization of Products. For many financial products, 9.6

there is little difference in the offerings from different

providers. As financial products become perceived as
commodities, firms are forced to compete more on price. 100 largest 10 most 10 banks with greatest
banks efficient banks improvement in
efficiency
SOURCE: DELOITTE RESEARCH

5
 More efficient banks fared better. The 10 banks in the group
with the best efficiency ratios (defined as the ratio of non-interest
expense to operating income) had an average efficiency ratio of
only 40.4 percent, and their share prices outpaced the group as a
whole, growing at an annual rate of 13.6 percent.
But the greatest increases in share prices occurred in the stocks
of the banks that showed the greatest improvement in their
efficiency ratios, rather than those that were most efficient in an
absolute sense. The 10 banks with the greatest improvement in
their efficiency ratios had an average ratio of just 60.8 percent—
better than the average ratio for the group as a whole, but far
behind the average ratio for the 10 most efficient banks. Yet the
average annual change in their stock prices over the period was
19.2 percent—significantly higher than the 13.6 percent gain for
the 10 most efficient banks.
More efficient firms are rewarded by the market, but the key
to maximizing shareholder value is increasing the efficiency of
operations. Rather than a goal that is ultimately achieved,
continually improving operating efficiency has to become a way
of doing business.
It is not surprising that financial services firms look first to
reducing headcount. Personnel costs are easily the largest expense
item, exceeding 60 percent of total non-interest expenses for some
institutions. Firms added employees rapidly during the 1990s to
serve booming markets in such areas as online securities trading,
M&A, underwriting, and IPOs. Employment in investment banks
around the world swelled by four-fifths over the past decade.
When revenues dropped in most lines of business, firms were
left with excessive payrolls. For example, cost-income ratios for
major securities firms deteriorated between 2000 and 2001.
(See Exhibit 2.)
Financial services firms must be especially careful to ensure
that staff reductions don’t damage customer service or threaten
hard-won customer relationships. One approach is to use
technology more creatively, but this becomes more difficult as IT
employees and budgets are also being slashed.
EXHIBIT 2. COST-INCOME RATIOS ARE RISING
Bank A
100% Bank B
Bank C
90%
COST-INCOME RATIO, %

6
Layoffs: Proceed with Caution
80%
The first way that most financial services firms look to cut costs is
by reducing the number of employees. More than twice as many
70%
layoffs have been announced by companies in the United States
through the first 10 months of 2001—almost 1.4 million—as were 60%
2000Q1 Q2 Q3 Q4 2001Q1 Q2 Q3 Q4
announced in all of 1999 and 2000 combined. Financial services TIME
Note: Cost-income ratios for three leading banks
firms are prominent among the companies reducing the number
SOURCE: DELOITTE RESEARCH
of staff. Investment banks cut more than 25,000 jobs through the
first three quarters of 2001. Some financial services firms have
announced that they intend to lay off as much as 20 percent of
their employees in certain divisions.
Even in continental Europe, where labor laws and unions tend
to make layoffs more difficult, firms are also reducing headcount.
One of Germany’s leading banks announced the first staff cuts
since the firm was formed in 1870, saying that staff reductions of
up to 10 percent were possible.

Firms also face the danger that they will lose valuable
knowledge and skills that can only be replaced with significant
hiring and training costs when business picks up. Some securities
firms laid off employees in the financial crisis of 1998–99 only to
find that they had to rehire them a few months later. Firms need a
clear understanding of what skills they need to retain and what
knowledge each employee possesses.
In fact, a Watson Wyatt Worldwide study found that fewer than
half the companies surveyed after the 1990–91 recession met their
profit goals after downsizing. "The evidence that downsizing
boosts productivity is very weak," Alan Blinder, former vice
chairman of the Federal Reserve Board, told The Wall Street Journal
1
Europe.
Even when planned with care, layoffs are at best only one
element of a strategic cost reduction program. Although they
reduce compensation expense, layoffs alone don’t increase
productivity. Firms require a strategic approach to cost reduction
that will generate the short-term cost savings that investors
demand, while creating a more efficient operating model over
the long term.
Deloitte Research – Strategic Cost Reduction
A Strategic Approach Required
Five characteristics of a strategic cost reduction program provide
advantages over piecemeal approaches:
1. Linked to Strategic Goals. A strategic cost reduction program
doesn’t rely on across-the-board staff or budget reductions.
Instead, it is targeted carefully to ensure that it complements,
rather than unintentionally undermines, a firm’s business
strategy.
2. Comprehensive. Rather than focus narrowly on staff
reductions, strategic cost reduction scours every aspect of the
enterprise to identify opportunities to reduce costs in such
areas as outsourcing, real estate, travel and entertainment,
employee benefits, and procurement.
3. Focus on Sustainable Cost Savings. A strategic approach to
cost reduction goes beyond volume-related savings to create
a more efficient operating model by rethinking both what the
firm does and how it does it.
4. Phased Implementation. A well-planned portfolio of cost
reduction initiatives includes both quick wins that provide
short-term savings and more radical measures that require
more time to implement and more investment but deliver
greater benefits.
5. Senior Management Commitment. A successful strategic cost
reduction program has the full commitment of senior
management, which can best be communicated by appointing
a prominent senior executive to lead the effort. A high-quality
project team is needed to manage the program with three
senior executives in very different roles: a diplomat to mediate
differences, a fixer to manage the operational details of the
program, and an enforcer to ensure that everyone implements
the program developed.
A strategic cost reduction program will produce greater short-
term savings as well as longer-term gains in efficiency. A five-step
methodology provides a framework for designing an effective
program to reduce costs across a firm.
7
 Crafting a Cost Reduction Program
A methodology with five steps is helpful in designing a
comprehensive cost reduction program:
Reexamine Strategy
Establish the Cost Base
Set Cost Reduction Targets
Identify Potential Initiatives
Prioritize Initiatives
1. Reexamine Strategy
Before designing a cost reduction program, firms need to
reexamine their strategy to ensure that it remains relevant,
particularly within a highly uncertain environment. Once a firm
has reconfirmed and clarified its strategy, it can proceed to design
a cost reduction program that complements it.
A number of prominent financial services firms have been
revising their strategies. AXA and ING both sold their investment
banking subsidiaries to concentrate on other businesses. Zurich
Financial Services ended its foray into asset management by selling
Scudder to Deutsche Bank, and has announced that it will float
Zurich Re in an IPO. Merrill Lynch sold its Canadian brokerage
8
business to Canadian Imperial Bank of Commerce, while Charles
Schwab announced that it would close its online trading joint
venture in Japan.
Yet the rapid changes in the business environment today
make developing a sound strategy more challenging than ever.
The Wall Street Journal reported that Richard Kovacevich, CEO of
Wells Fargo & Co., told his board that “whatever budget we come
up with is almost meaningless.” 2 Economist that you “don’t want to bet your life on a forecast. This
Traditionally, a firm based its strategy on its best prediction of
what will occur that will affect the firm’s business and when it will
occur. With today’s increasingly uncertain future—whether about
economic growth, consumer preferences, or the impact of
terrorism—firms need an approach to strategy that doesn’t require
them to pretend to have a clear picture of the future.
Deloitte Research calls this new approach “Strategic Flexibility”
— first defining a range of scenarios of what the future may hold
and then developing the optimum strategy to respond to each
scenario.3 (See The Deloitte Research Strategic Flexibility Initiative on
page 26.) Strategic initiatives that are common to all the scenarios
constitute the firm’s core strategy, that is, initiatives that should be
undertaken no matter what the future may hold. Investments to
improve customer service may be part of the core strategy for many
firms. On the other hand, the firm’s contingent strategies only make
sense for certain scenarios. For example, expansion into China may
only make sense if China continues to open its market to foreign
investment as part of its agreed entry into the World Trade
Organization, the political situation remains stable, and Chinese
consumers become more financially sophisticated.
Core initiatives will go forward no matter what scenario comes
to pass. For contingent initiatives, which are only appropriate to
some scenarios, firms must be prepared to implement them if their
scenarios become reality. For example, a firm may forge a strategic
alliance with a Chinese firm to give it the option to expand its
presence in the Chinese market if conditions warrant.
Once the core and contingent strategies have been
formulated, a firm’s cost reduction program will have to
demonstrate the same flexibility. The cost reduction program will
need to ensure that it preserves the capabilities required to execute
the core strategy, while providing the ability to change course as
required to implement contingent initiatives. Commenting on the
uncertain economic environment in which firms operate today,
Don Layton, head of J.P. Morgan Chase’s investment bank, told The
makes you more interested in a flexible cost structure, and more
radical in cutting.”4

2. Establish the Cost Base
The next step is to determine the current cost baseline—the costs
that will be incurred if no new cost reduction initiatives are
undertaken. Determining the cost baseline allows a firm to
measure the impact of its cost reduction program by comparing
actual costs to the expense levels that would have occurred
without it.The contribution of major expense categories to overall
spending in major banks and securities firms is provided in Exhibit
3. (Quantifying spending on these categories by insurance
companies and real estate entities is difficult due to reporting
differences.)
A cost reduction program is only as good as the data on which
it is based. Detailed cost data are essential to identify which factors
are driving business costs and provide senior management with
the justification for undertaking cost reductions. An accurate
analysis of transfer pricing is an essential part of this effort. Yet
many financial services firms suffer from poor management of cost
information. A major reason is the complexity of the task, with
around 200 separate expense categories in a typical financial
services organization. Firms can start by analyzing the current
year's budget, along with any necessary revisions to reflect
Deloitte Research – Strategic Cost Reduction
planned initiatives that are not included in the budget, such as
anticipated staff reductions, increased disaster-protection and
business-continuity measures, or the introduction of new products.
This is also an opportunity to revisit planned initiatives and cancel
any that no longer support the firm’s strategy or fail to meet
investment thresholds.
This top-line analysis then needs to be drilled down, analyzing
each element of the firm’s costs and headcount by business line,
support function, and location. The analysis should include a clear
statement of any rules for allocating central and support services,
such as systems development and marketing, to individual lines
of business.
Beyond simply quantifying the cost base, firms should also
dig into the past to unearth the history of how the organization
came to have its current cost structure. Each organization’s cost
base is inevitably a product of many regimes of corporate
leadership and often numerous acquisitions. Understanding this
history often helps a firm identify promising areas for cost
reduction. For example, a large U.S. commercial bank was able to
reduce mortgage processing costs by 30 percent once it changed
a handful of archaic rules that were no longer relevant.

EXHIBIT 3. EXPENSE ITEMS: COMMERCIAL BANKS VS. SECURITIES FIRMS

PERCENT, 2000

COMMERCIAL BANKS* SECURITIES FIRMS **

Compensation 38–50 52– 60
(salaries, incentive compensation, and benefits)

Communications and IT 7–20 3–10

(including outsourcing)

Occupancy 5–8 4–7

Advertising and Marketing 2–5 4–10

Other 18–25 12–14

Income Tax 17–19 8–15

*Analysis of spending of four major U.S. banks as provided in financial statements.
**Analysis of spending of three major U.S. securities firms as provided in financial statements.
Note: Insurance companies and real estate entities have similar expense categories, but analysis of spending is difficult given reporting differences.
SOURCE: DELOITTE RESEARCH

9
 3. Set Cost Reduction Targets
In setting the goals for a cost reduction program, firms need to
consider what is possible to achieve and also what investors
expect. There is no single method to establish these targets;
instead, they should be analyzed from several perspectives.
■ Competitive View. One approach is to quantify the level of
cost savings that would be required to raise the firm’s
efficiency to the median efficiency of the leading firms in its
Each view provides one perspective on the appropriate cost
reduction targets. By examining cost reduction from all three
perspectives, firms can triangulate among them to set a cost
reduction target that is both achievable and acceptable to
investors. (See Exhibit 4.)
4. Identify Potential Initiatives
Once the strategy is set, the next step is to identify potential cost

industry. Examining what the leading competitors have reduction initiatives. Four distinct methods are available. By using

achieved provides one perspective on the size of cost them all and aggregating the results, a firm can generate a

reductions that are possible. comprehensive list of potential initiatives—a more

■ Operational View. An internal assessment of possible cost comprehensive list than would be generated by a single approach.

savings can be developed by analyzing each line of business The four methods are the following:

and function to identify potential expense reductions and ■ Management Knowledge. Where do management and

then aggregating these potential savings across the firm. employees believe opportunities exist? Interviews, focus

■ Investor View. An analysis from an investor’s perspective groups, and workshops can be held with employees at all

determines the level of cost reduction that will be required levels to collate their knowledge of operations and steps that

to support a firm’s current share price, assuming no growth could be taken to lower costs. Although the suggestions

in revenues. In this worst-case scenario, the expected generated by these sessions are often directionally correct,

increase in net income reflected in the share price will need they should be treated as hypotheses that need to be tested

to come from cost reductions alone. Most firms find that this against facts.
10
analysis yields a required expense reduction of 10 to
15 percent.

EXHIBIT 4. SETTING COST REDUCTION TARGETS

ILLUSTRATION FROM MAJOR COMMERCIAL BANK
POTENTIAL SAVINGS
DESCRIPTION OF TOTAL COST BASE
Competitive View ■ Benchmark comparison of 11–15%
key performance metrics

10–13%
Savings Opportunity Operational View ■ Assessment of cost reduction 10–15% Potential Savings
Assessment opportunity by organization
and function

■ Shareholder expectation 7–11%

Investor View imperative based on
average return
SOURCE: DELOITTE RESEARCH

■ Cost Structure Analysis. Where are the large areas of cost
and what are the primary cost drivers? A firm can also
analyze each expense line item across all functions, lines of
business, and processes to identify which have the highest
costs for particular expenses and which are most appropriate
to reduce.
A firm should also identify high-cost processes that cut across
line items and lines of business, such as billing, payment, and
transaction processing. This analysis can discover areas
where similar or duplicate activities are being performed by
different functions that could be streamlined.
■ Internal Comparative Analysis. How do costs compare
across the organization? By comparing cost centers in the
firm, a firm can identify where costs are high relative to
revenues. A comparative analysis should be conducted of
costs for business units, product groups, delivery channels,
geographic locations, and customer segments. This analysis
can discover discrepancies in staffing or expense levels,
although it must always take into account the specific
requirements of the products or services involved. It can also
highlight areas that have significant levels of manual
processes that could potentially be automated. A
comparative analysis can identify the best practices that the
firm should consider replicating.
■ External Comparative Analysis. How does the firm
compare to best practices? For each area, a firm needs to
assess how its performance compares to the companies
exhibiting best practices. The firm should then determine
what level of improvement would be required to place it at
or near best practice on the relevant metrics.
This phase results in a list of potential cost reduction initiatives,
which can then be prioritized to create a cost reduction program.
Deloitte Research – Strategic Cost Reduction
5. Prioritize Initiatives
The final step is to prioritize the list of potential initiatives. While
each firm needs to develop evaluation criteria suited to its
situation, the following considerations are likely to form the core
of any evaluation:
■ Required Investment. What is the required investment,
both financially and in staff time?
■ Size of Benefit. What is the potential benefit if
implemented?
■ Speed. How quickly will the expected benefits be realized?
■ Ease of Implementation. How easily can the initiative be
implemented? Are there technical or cultural obstacles?
■ Risk. How significant are any risks in implementation?
■ Contribution to Strategy. How will the initiative affect the
organization’s strategic goals?
■ Impact on Business Continuity. How will the initiative
affect the firm’s ability to withstand a disruptive event and
maintain continuous operations?
Using the criteria developed, the firm can design a program with
a mix of short-term and longer-term initiatives in which each
phase generates a positive return on investment and is aligned
to overall business goals. A detailed business case must then be
developed for each high-priority initiative, detailing the required
investment, the timetable to implement and to realize savings,
and the benefits promised. (See Exhibits 5 and 6.)
11
 EXHIBIT 5. DESIGNING A PORTFOLIO OF COST REDUCTION INITIATIVES
Creating a low-cost
operating model
INCREASING BENEFITS AND SUSTAINABILITY

High ■ Reengineering

Streamlining ■ Automation
the cost base ■ Outsourcing
■ Real Estate
Functional consolidation
■
Medium ■ Strategic sourcing
Quick wins
■ Human resources

■ Tax
■ Advertising and marketing
■ Travel and entertainment
Low
Short Medium Long
INCREASING IMPLEMENTATION TIME AND COSTS
SOURCE: DELOITTE RESEARCH

EXHIBIT 6. PRIORITIZING POTENTIAL COST REDUCTION INITIATIVES

OPPORTUNITY (EXAMPLES)
Migration of IT Risk
Shared transaction development Trading desk management
service processing rationalization consolidation efficiency
CRITERIA center
Contribution
12 to strategy
Potential size
of benefit
Ease of
implementation
Efficiency gap
Speed of
realization
Organizational
impact
Priority 1 2 1 2 2
= Low = Medium = High

SOURCE: DELOITTE RESEARCH

 Deloitte Research – Strategic Cost Reduction
Mistakes to Avoid:
Features of Unsuccessful Cost Reduction Programs

■ Across-the-Board Cuts. Indiscriminate reductions that cut

muscle as well as fat.

■ Strategy Undermined. Cost reductions that threaten the core

capabilities required to achieve the firm’s strategic objectives.

■ No Buy-in. Insufficient input and involvement by employees who

are best placed to identify savings and will have to achieve them.

■ Analysis Paralysis. Prolonged analysis of the business and

potential opportunities.

■ Too Many Initiatives. No single message about what is most

important.

■ Wrong Mix of Initiatives. For example, a few large, complex

projects, instead of a mix of easy and hard, short- and long-term
projects.

■ Inadequate Leadership. Lack of active and visible involvement

by senior management.

13
 Building Blocks for a
Cost Reduction Program
The cost reduction methodology outlined above will yield a
coordinated set of initiatives specifically tailored to a firm’s needs.
But while each firm is unique, cost reduction initiatives can be
organized into broad categories that are relevant to most
organizations, which range from those offering quick wins to
others providing substantial savings but requiring a longer
commitment of time and resources. This section describes some
of the areas, including a sampling of innovative practices, where
many firms find opportunities to reduce costs and increase
operating efficiency.
14
Human Resources Initiatives Beyond Layoffs
Personnel costs are by far the largest expense item for financial
institutions, and firms have made reducing these costs a top
priority. Automation and reengineering are two strategies that can
reduce the number of employees required for a given volume of
business by increasing a firm's operational efficiency. (See the
sections on Automation, page 21, and Reengineering, page 22.)
Beyond reducing headcount, however, additional strategies are
available to reduce personnel expenses. Here we focus mainly on
examples from the United States to illustrate practical examples
of short-term cost reduction initiatives.
Severance Payments. Layoffs reduce compensation expense,
but they also require firms to pay significant severance benefits.
In the United States, firms can often reduce these expenses
through innovative strategies that pay severance benefits from
the firm’s qualified pension plan. If its pension plan is over-funded,
a firm can pay severance benefits from pension assets rather than
from operating revenues. In addition, the firm saves FICA taxes,
which range from 2.9 percent to 15.3 percent. (The individuals
receiving the benefits save FICA taxes, as well.)
Even if no headcount reductions are expected, an opportunity
exists to turn surplus pension assets into working capital by
transferring non-qualified executive pension benefits to a
company's qualified plan. One large U.S. bank used this approach
to realize a one-time cash-flow savings of US$6 million.
When a pension plan is not over-funded, a firm can still often
achieve a valuable cash-flow savings by paying benefits from the
plan and then repaying over a 30-year period. In addition, the first
payment may not be due for more than a year, depending on the
specific date of the transaction. For a firm with a US$1 million
severance payment, the annual amortized repayment over 30
years at 8 percent would be US$108,500.The reduced cash flow is
especially valuable in the current economic climate.

Employee Benefits. Typically, 18 to 20 percent of
compensation expense goes to employee benefits. With
compensation often accounting for up to 60 percent of a financial
services firm’s total expenses, benefits alone can account for
12 percent of total expenses. Yet, the cost of employee benefit
programs has not usually been managed as aggressively as other
elements of the business.
Some financial services firms have four or five separate
pension and benefit programs, often due to acquisitions, resulting
in higher administrative costs. The level of benefits may also vary
significantly across plans, increasing costs and threatening to
undermine morale. By consolidating pension and benefit plans,
firms can reduce both fees to vendors and internal administrative
costs. Where plans differ in the level of benefits provided, firms
can consider moving over time to a uniform level of benefits at a
lower cost. An analysis conducted for a major U.S. insurance
company found that rationalizing employee benefits could
potentially realize more than US$40 million in annual savings.
Compensation Structure. Compensation systems are
coming under scrutiny to ensure that they support a firm’s strategy.
A common approach is to link incentive compensation more
closely with performance. Today, many firms are paying too much
for poor performers and not enough for high performers. As part
of this review, firms are also considering shifting short-term cash
compensation to longer-term programs that serve to retain strong
performers. Innovative non-qualified deferred compensation and
performance-driven equity plans are two approaches that some
firms are adopting. Critical to the development of these plans is
their link to individual performance. Finally, firms are using strategic
performance management systems that identify the critical
competencies that are required to achieve the firm’s business goals
and then linking these competencies to merit increases and
promotions. Employing a range of these techniques has the
potential to reduce a firm’s cost of sales by 3 to 6 percent.
Deloitte Research – Strategic Cost Reduction
Administrative Efficiency. Firms have the opportunity to
significantly reduce their costs of HR administration, often by as
much as 25 percent. As the result of mergers, acquisitions, and
ERP implementations, many large financial services firms are faced
with a complex web of HR technologies and systems. Some
services may be outsourced to vendors, while others are managed
internally on multiple legacy systems. Coordinating and
rationalizing these systems and delivery models can reduce
administrative costs by increasing automation and boosting the
productivity of the HR function. Service levels can improve as well,
with managers and employees gaining remote access to timely
HR information.
Additional techniques can also generate administrative
savings. Employees in other departments performing HR functions
can often be consolidated or eliminated. In some cases, headcount
can be reduced by consolidating technology staff in HR with those
supporting payroll, T&E, tuition reimbursement, and benefits
collections. Consolidation of search firms at a time when little
hiring is being done can provide significant negotiating leverage
that will yield sustainable savings in recruitment fees when the
pace of hiring picks up. Finally, some firms are reducing costs by
outsourcing HR administration to an outside vendor. (See Page
18.)
Training. Consolidation of training programs and use of the
Internet to facilitate training (e-learning) can provide both direct
and indirect savings by reducing the costs of program
development and delivery and by increasing employee
productivity by eliminating travel. Although these initiatives are
far from simple, requiring changes in both infrastructure and
business culture, they can generate significant cost reductions that
can be measured in the hundreds of millions of dollars for large,
global enterprises.
15
 Reducing Occupancy Costs Containing Travel and Entertainment Expenses
Real estate is a large item on a financial services firm’s income Travel and entertainment (T&E) expenses are an attractive target
statement, yet it does not always receive adequate attention in for expense reduction. In most cases no investment is required,
cost reduction programs. Interest expenses are a key factor in only changes to policies and procedures that can usually be
overall real estate costs, and firms need to monitor carefully implemented quickly.
refinancing opportunities as interest rates change. Firms can also For example, some firms are requiring special permission
reduce occupancy costs and generate needed cash flow through before employees can travel first-class, while others are banning
other innovative approaches to their real estate. first-class travel completely. Firms are also canceling many trips
th
Renegotiating Leases. In the wake of September 11 , entirely in favor of videoconferencing and webcasts.
financial services firms are more interested in dispersing their Having systems in place to ensure that T&E policies are
operations— particularly from Manhattan—and other central followed is just as important as having the right policies. Firms
business districts to minimize the impact in case of another attack. can arrange with their travel management firm to receive a pre-
The lower occupancy costs in suburban locations are another trip report showing who is going where, at what price, and why, so
attraction.These trends have given tenants, especially well-known that they can confirm that the travel arrangements conform with
firms, an increased ability to renegotiate their leases. The potential policy.
savings from renegotiation vary greatly depending on the Fraud is also a problem that firms need to address with closer
dynamics of each real estate market and the negotiating power monitoring. A 2001 Gallup survey of 10 million U.S. employees
of the firm, but some firms can hope to achieve rent reductions of suggests that at least 25 percent use creative accounting when it
up to 10 percent. comes to their expense reports, such as inflating claimed taxi fares
Contesting Real Estate Assessments. Firms that own or requesting reimbursement for personal expenses.
property may have an opportunity to reduce their property tax
16
liability by contesting their assessments. Property values are now
declining, yet most assessed values were established when
property values were higher.
Seeking Business Incentives. Firms should examine the
opportunity to secure business incentives from state and local
governments, such as reductions or deferrals of property and sales
taxes. While the potential may be highest in New York City in light
of September 11th, governments around the United States are
likely to be more receptive to requests for business incentives as
they work to retain jobs and business activity in the midst of the
economic slowdown.

Advertising and Marketing Expenses
Advertising and marketing expenses are a significant expense
item, often accounting for 2 to 4 percent of total expenses. Firms
can trim marketing expenses by working smarter—negotiating
harder, consolidating vendors, and assessing more carefully the
return on their marketing investment. Beyond such efforts to
achieve the same results at lower cost, the discretionary nature of
these expenditures leads some firms to target advertising and
marketing budgets for more drastic reductions. Firms have the
option of cutting back on advertising, reducing direct mail, and
canceling promotional events. Even better, these savings can be
achieved quickly, often within 60 to 90 days. The shrinking size of
many business publications due to fewer pages of advertising is
testament to the appeal of cutting marketing budgets.
But drastic reductions in advertising and marketing may be
penny-wise and pound-foolish. A marketing campaign requires a
year or more before it creates awareness in the marketplace and
generates results. Firms that slash marketing will only have to
increase expenses eventually, often at greater cost, to avoid losing
business.
So far, many financial services firms appear to have realized
the importance of maintaining a strong marketing presence.
Advertising by U.S. banks increased 12.4 percent in the first nine
months of 2001 compared to the comparable period a year before.
An informal survey by U.S. Banker found that many banks
continued to increase their advertising in the fourth quarter as
well .
Firms that can maintain spending, or cut only modestly, can
build market share. "When other companies are pulling back on
advertising, you have an opportunity to be heard and to have a
greater impact," Karen Mulvahill, senior vice president at Comerica
Inc., told U.S. Banker. "The strong companies really should stay in
5
there.”
Deloitte Research – Strategic Cost Reduction
Minimizing Tax Liability
Financial services firms can often reduce expenses through
innovative strategies to minimize their tax liability in the
jurisdictions around the world where they do business. In many
cases, cash flow can also be increased by deferring required tax
payments to a subsequent year. Other cost reduction initiatives,
such as disposition of subsidiaries or strategic procurement,
should be structured carefully to take advantage of tax provisions
that can minimize tax liability.
Tax-reduction opportunities vary by country. By way of
illustration, the following are some of the opportunities for firms
operating in the United States to reduce tax liability.
Tax Implications of Other Strategic Cost Management
Initiatives. Many, if not most, cost reduction initiatives have
significant tax aspects. For example, termination-type payments
when reducing headcount can often be made in a tax-efficient
manner. Closing or consolidating offices will have international
tax and/or state and local tax consequences that must be
managed carefully.
Corporate Restructuring. When restructuring, a firm can
often significantly reduce its effective tax rate and avoid Subpart
F and foreign tax credit limitations with respect to its business
outside the United States, as well as enable the U.S. operations to
access low-taxed earnings and profits accumulated by its non-
U.S. affiliates. Restructuring should also be considered in state and
local tax planning, as well.
Research and Development. Firms can often obtain research
and development credits of approximately 1 percent of their
annual information technology expenditures using such
provisions as the Research Credit Fixed-Base Percentage
Reduction, Enhanced Research Credit for Flow-Through Entities,
and Increasing Qualified Research Wages.
Financing Strategies. In some circumstances, a firm may be
able to take interest deductions in both the United States and a
foreign jurisdiction. Other strategies reduce tax liability when a
U.S. firm finances non-U.S. acquisitions or refinances existing
obligations of their foreign subsidiaries.
17
 Outsourcing
Outsourcing has been a popular cost reduction strategy for years,
but now firms are applying the concept more broadly and
employing new outsourcing arrangements. Firms turn to
outsourcing to benefit from the economies of scale that a service
provider with larger volumes enjoys, while avoiding large IT
investments. In addition, outsourcing allows firms to focus
resources and senior management time on core business
activities.
But outsourcing is not a cure for an inefficient operation—in
many ways it is as closely linked with financial management as it
is with cost reduction. To reap the maximum benefits, workflow
should be streamlined before it is outsourced, and then the firm
needs to work with its vendor to continually improve operations.
For this reason, many firms are looking for shorter contract periods,
for instance, five years rather than 10 years, so that they can change
the specifications of the contract as their business evolves.
Financial services firms are taking a fresh look at their
operations to see if there are additional opportunities for
outsourcing. Processes or functions that are not central to a firm’s
strategy make good candidates.
18
Business Process Outsourcing. In the past, firms have
outsourced specific processing services, such as consumer
payments, claims, payroll, or orders, as well as specific aspects of
their information systems, such as data center operations, desktop
management, and e-commerce services. Now firms are moving
to outsource aspects of major business processes, such as finance,
human resources, marketing, and sales. Business process
outsourcing across all industries is growing at 29 percent annually,
much faster than other types of outsourcing.
The following are just a few of the firms that have
substantially reduced operating costs through outsourcing
business processes:
■ One of the top five bank holding companies in the United
States outsourced its process for issuing credit cards, which
involved several groups in the firm. Although moving from
an in-house to a third-party provider was complex, the
change resulted in a US$6 million reduction in its total
annual cost of US$30 million.
■ By outsourcing its IT operations, a major U.S. insurance
company reduced its IT expenditures by 20 percent, while
still handling increased volumes.
■ A European insurance company’s U.K. operations saved
£15 million annually by outsourcing its IT operations.
New Outsourcing Models. Not only are firms outsourcing new
functions, they are also employing new business models. Some
firms are entering into relationships with their vendors that are
more like strategic alliances than traditional vendor relationships.
For example, Bank of America signed a 10-year contract for
US$1.1 billion with Exult, which will assume responsibility for
much of the bank’s human resources and administrative services,
including payroll, accounts payable, and travel-related expenses.
In addition to receiving a guaranteed savings of 10 percent per
year, Bank of America will have access to sell financial services to
the roughly half million employees of other Exult clients, like BP
Amoco and Unisys Corporation.
Financial services firms are also collaborating with their
competitors to achieve higher volumes and economies of scale.
In the United Kingdom, Barclays and Lloyds TSB (the third and
fourth largest banks in the country) combined their check
processing into a new company controlled by Unisys. Each bank
has a 24.5 percent interest in the new company, which will not
only handle their own check processing, but will also compete
for business from other banks.

Strategic Sourcing
Many financial institutions pay little attention to their external
spending and consequently miss out on the huge potential for
cost savings provided by strategic sourcing. Savings can be
achieved on a broad range of purchasing categories, including
employee benefits, telecommunications, advertising and
marketing materials, travel, facilities, and maintenance. (See
Exhibit 7.) Procurement should always be aligned with a firm’s
strategic goals and take into consideration such factors as service
quality, corporate relationships, and competitive dynamics. While
cost is never the sole consideration, firms can achieve important
cost reductions by reviewing their procurement processes.
Most firms purchase supplies and services from a wide variety
of vendors. Price varies between vendors, and each may have
different terms and conditions of sale, making analysis and
comparison difficult. The purchasing process often varies, with
individual departments or branches deciding which products and
services to purchase, and negotiating contracts separately.The lack
Deloitte Research – Strategic Cost Reduction
of standards makes it difficult or impossible to ensure that
appropriate amounts of goods and services are purchased at a
competitive cost and that contracts are enforced. By making
numerous individual purchases, firms forego economies of scale.
Firms usually attempt to improve sourcing by increasing
competition—soliciting additional bids and negotiating harder.
While these are helpful, other strategies that can unlock additional
savings are often overlooked. Innovative strategies include the
following:
■ Increasing price transparency by disaggregating bids.
■ Reducing complexity by establishing uniform standards.
■ Reducing the number of suppliers within a given category.
■ Improving monitoring and enforcement of contract
compliance.
■ Creating a global procurement structure to leverage the
organization’s global purchasing power.
■ Working in partnership with key suppliers to jointly lower
costs.

EXHIBIT 7. POTENTIAL SAVINGS FROM STRATEGIC SOURCING

Effective monitoring prevents and/or 4% 22%

Traditional sources of savings recaptures savings lost due to vendor
Additional sources of savings cheating

5%
Lacking a comprehensive price Making a customer cheaper
tracking system, most vendors to service enables a vendor
will find ways to charge more to offer a lower price 3%
than negotiated rates Users should be ordering
only what they need.
7% -4% 4% Exceptions should be
monitored and
appropriately controlled
Sourcing 101
6% Straightforward pricing metrics allow
bid comparison and facilitate vendor
3% competition

Vendor Tough vendor Savings LOST Typical purchasing Create price Leverage vendor Define and Monitor and Strategic
consideration negotiations due to vendor result transparency by economics monitor product enforce vendor sourcing
non-compliance unbundling standards compliance result

TRADITIONAL WINS VALUE ADD

TYPICAL CLIENT SITUATION
SOURCE: DELOITTE RESEARCH

19
 The following firms illustrate the substantial savings that can Functional Consolidation
be achieved by strategic sourcing: Creating shared-service centers to centralize functions such as

■ One of the largest commercial banks in the United States accounts payable, customer order processing, credit card

was concerned to reduce its US$500 million annual processing, and other back-office functions can achieve significant

procurement expense, especially since a merger had left it savings—although moves to concentrate operations need to be

with duplicate vendor contracts in such areas as computer balanced with concern over risks from disasters.Today, most firms

maintenance, direct marketing, and office equipment. By maintain multiple centers for these activities, often located in each

renegotiating duplicate vendor contracts, the firm reduced of the countries or regions where they operate. Financial services

procurement expense by more than US$50 million within firms that have grown through mergers have often not integrated

the first 12 months, and expects the program to yield the operations and information systems of each of their

US$80 million in annual cost savings when fully acquisitions.

implemented. Moving to centralize these activities drives down costs in

■ A major U.S. commercial bank undertook an aggressive several ways. Redundant IT systems are eliminated, leading to

program to reduce its annual telecommunications expense, fewer hardware and software purchases and a lower headcount.

including contracts for voice, data, and wireless service. The Shared-service centers can be located wherever real estate and

firm analyzed best practices in the industry and reorganized labor are cheapest, provided the labor force is adequate and well-

its telecommunications sourcing through such initiatives as trained. Firms have put these centers in such locations as India to

renegotiated contract rates, competitive bidding, a central benefit from lower operating costs.

contract database, and enterprise-wide sourcing. The Firms can hire the best expertise centrally and make it

strategic sourcing program reduced the bank’s total voice available to its divisions and subsidiaries. Given their lower

and data bill by 15 percent within 24 months. volumes, local divisions often can’t justify the expense of hiring
20
■ A global diversified financial services company top-quality IT professionals.

headquartered in Europe established global procurement A major European insurance company with global operations

and uniform procurement processes for IT, renegotiated its was formed from a merger, resulting in more than 1,000 IT

fragmented IT contracts using competitive bidding, and employees and an annual IT budget of more than US$100 million.

installed a new procurement technology infrastructure. The By reducing the number of mainframe operations centers from

result was a savings of approximately US$200 million in the five to two and streamlining the IT function, the firm was able to

firm’s annual IT procurement expense of US$1.2 billion. reduce its annual IT expenses by 20 percent over three years.

Strategic sourcing is a critical tool for financial institutions that A major investment bank made significant savings from the

want to achieve sustainable cost savings. A holistic approach to centralizing of a number of disparate activities into a new unit

sourcing can not only reduce overall spending, but can also yield created to administer all business services. The centralization

additional benefits including better service levels and improved involved the merging together of real estate, human resource,

access to the latest technologies. Strategic sourcing is more than procurement and financial operations into a central unit. The

a tactical cost reduction effort. Instead, it is integral to developing complex operation took 18 months and involved 4,000 staff, but

sustainable long-term competitive advantage. the bottom-line benefits were significant with a fifth of total costs
being removed.
 Deloitte Research – Strategic Cost Reduction
Centralization also improves service. With all the data for a The ultimate vision for securities firms is straight through
particular aspect of the organization in one location, gaining processing (STP)—the processing of trade information from front
access to data for any location or business unit becomes easier. office to confirmation, payment, and delivery automatically,
As a result, management reports analyzing data across the without the need for manual processes such as the re-entering of
enterprise can be produced more quickly and cheaply. information. Our analysis found that achieving STP would result
in an estimated 15–20 percent reduction in annual operating
Automation expenses after the initial investment for a hypothetical broker-
Financial services firms have opportunities to reduce headcount
dealer, due to the improved labor and systems efficiencies.
and administrative expenses by using technology to automate
With STP requiring a substantial investment at a time of
manual processes. While these projects can be complex, the cost
declining revenues, each firm will need to assess carefully its
savings are significant. Beyond increased efficiency, firms also
current processing environment and where it should invest limited
benefit from reduced processing errors.
resources. Some firms with older technology will find that they
The following are a few of the areas where financial services
need to replace significant portions of their legacy systems to
firms have achieved substantial cost reductions through
achieve STP. But other firms will be able to avoid the expense and
automation.
complexity of replacing legacy systems, at least in the near term.
Straight Through Processing. Broker-dealers are
Instead, they will upgrade existing systems and rely on the latest
automating trade processing to reduce settlement times to T+1,
technologies to knit them together.These firms are turning to Web-
that is, settlement within one day after a trade occurs. Asset
enabled tools, data warehouses, and middleware to allow multiple
management firms are investing in order management systems
legacy systems to seamlessly interact and function as if they were
that route orders to multiple brokers, and provide portfolio
one.
modeling and compliance verification.Traditional exchanges and
e-Procurement. Many firms are going beyond simply
alternative trading systems are also investing to prepare for ever-
purchasing online to automating the entire purchasing process,
expanding trade volumes.
with data entered manually only once and then routed
For example, one diversified financial services firm now
automatically, so that most paper is eliminated. E-procurement
processes almost 100 percent of its investment accounting and
systems not only order goods electronically, they can automatically
asset management transactions automatically. The firm’s
match the goods received with the purchase order and invoice.
automation project achieved its return on investment in 15
Some systems automatically notify the supplier that payment has
months and reduced total expenses by 40 percent.
been authorized so that the invoice can be eliminated and the
Another example is a global investment bank that cut the
reconciliation process simplified. Financial data are updated in real
costs of processing money market transactions in half over a two-
time throughout the process and can link with the firm’s financial
year period by eliminating most manual processes. The project
systems.
has been so successful that it has created a joint venture to offer
similar back-office processing services to other banks.

21
 Reducing the Billing and Collection Cycle. Firms can
generate significant savings by reducing the time required to set
up accounts, generate invoices, and collect outstanding balances.
The strategies that have proven successful include clearly defining
performance goals across functions within the firm, standardizing
contracts, streamlining account setup and maintenance, and
automating the production and distribution of invoices. These
initiatives not only reduce operating expenses, they also improve
cash flow that results in increased interest revenue of
approximately US$11,000 per day for each US$100 million in
revenue.
Travel and Entertainment Administration. Automation can
reduce the 10 percent of total T&E expenses that is spent on
administration. One innovation is automated reporting. An
analysis by Visa International found that automated reporting
systems can achieve supplier discounts of 18 percent and
administrative savings of 80 percent. For example, while the cost
of processing a manual expense report is about US$25, the cost
drops to just a few dollars in an automated system.
Reengineering Business Processes
22
Some of the greatest long-term gains in operational efficiency are
achieved when firms reengineer business processes to
fundamentally change how work is done. Benefits from
reengineering can be maximized by integrating it with other cost
reduction initiatives such as strategic sourcing and automation.
The approach is to take a zero-based evaluation of each business
process and ask: How would the firm design this process today if
it were starting from scratch?
The first step is to define the core functions of the organization
and the individual business units. Secondly, the uses, value, and
output of each activity need to be assessed in light of the firm’s
goals to identify steps that don’t add value. A useful technique is
to map each process to identify any bottlenecks, redundancies, or
unnecessary handoffs.
Once a new process has been designed, most firms use piloting
and simulation to test and optimize the design. An important
consideration is that the streamlined process not weaken risk
management controls or expose the firm to other liabilities. Firms
then need to develop the business procedures and rules to govern
the process and build the necessary infrastructure to support it.
They also need to consider the impact of the redesigned process
on the organization, for example, whether the need for physical
facilities or for employee training will change.
Redesigning a business process to eliminate unnecessary steps
usually allows a firm to reduce headcount significantly. (See Exhibit
8.) In addition, streamlining processes saves additional expenses
by reducing cycle time and error rates.
The redesign of the telephone mortgage lending process by
a major U.S. commercial bank provides a good example of what
can be achieved. The bank set a goal of increasing the efficiency of
its mortgage process to match best practices in the industry. In
addition, it wanted the redesigned process to deepen the customer
relationship and improve the bank’s value proposition.
The bank increased efficiency and reduced errors in the
telephone mortgage lending process by reducing the number of
handoffs between departments from five to two. The loan center
associate who makes the loan decision now notifies the customer
directly, rather than passing the decision back to the sales associate.
The ultimate goal is to reduce handoffs to just one—the loan center
associate will receive the application, make the decisions on
lending and collateral, prepare the closing documents, and only
hand off the loan to a personal banker to conduct the closing.
The results have already been dramatic. The time required to
make a decision on a loan application dropped an astounding
87 percent in a year and a half—from 2.4 days to just 0.3 days. The
total cycle time from loan application to closing has dropped from
36 days to 19 days. With quicker service, revenues and customer
satisfaction are both up.
 Deloitte Research – Strategic Cost Reduction
EXHIBIT 8. SAMPLE REENGINEERING PROJECT
STAFFING IMPACT ANALYSIS
POTENTIAL IMPACT OF REENGINEERING ON STAFFING LEVELS
CORPORATE LENDING GROUP AT A MAJOR BANK

BEFORE AFTER
10% 100% 14%
11% 15%
22%
33%
27%
38%
30%

Relationship Lending Analysts Credit Other Total Senior Relationship Credit Total staff
managers managers staff support impacted bankers bankers and to be
staff support redeployed

PROCESS MAPS
BEST PRACTICE LOAN APPLICATION PROCESS
Annual savings
FRONT Prepare streamlined Transmit authorized US$2.7M
OFFICE online application application

MIDDLE Review and

OFFICE approve application

BACK Loan operations starts

OFFICE processing loan

CURRENT LOAN APPLICATION PROCESS

Begin Prepare Department RM provides RM
application, manager RM receives
FRONT two-page additional approved compiles RM submits
OFFICE transaction including all chops info to CO packet for closing
write-ups completed application
memo as requested LCD memo
and analysis application

RM requests CDA CO CO forwards

global completes requests CO application CO informs
Receive CDA sends RM verbally
transaction exposure preliminary application additional completes to group
report as risk information risk analysis head for and sends
memo to CCO memo
MIDDLE appropriate assessment from RM decision
OFFICE

CCO chops LCD reviews

application application

BACK Loan ops

OFFICE starts
processing

Legal chops
SUPPORT application

SOURCE: DELOITTE RESEARCH

23
 Tomorrow’s Agenda Strategic cost reduction is not for the faint of heart—there is
little gain without pain. Before embarking on a cost reduction
Optimizing operating efficiency should be a linchpin of corporate
program, firms need to ask themselves some fundamental
strategy in both good economic times and bad. Too often,
questions:
however, financial services firms only focus on controlling costs
1. The Devil is in the Details: Does the organization have—or is
when they are forced to respond to a slowing economy. Many
it prepared to develop—accurate, detailed cost data on which
firms then rush to reduce staffing levels and other expenses to
to design and defend a strategic cost reduction program?
reflect reduced business volumes. Yet volume-related reductions
2. Best Practice: How efficient are individual business units when
alone leave firms no more efficient than they were before. And
compared both internally and to leading competitors?
unless targeted carefully, cost reductions can threaten to
3. Investor Criteria: What are investor expectations regarding the
undermine a firm’s business goals and value proposition.
size and speed of cost reductions?
To gain long-term competitive advantage and increase
4. Gauging Appetites: How urgent is the need to reduce costs?
shareholder value, firms need to make ongoing improvements
Does the organization have the appetite for the fundamental
to operating efficiency a permanent way of doing business
changes required to increase efficiency?
throughout the business cycle. A strategic approach ensures that
5. Total Commitment: Is senior management fully committed to
a cost reduction program generates permanent improvements
the effort and ready to stay actively involved? What methods
in operating efficiency, while being aligned with a firm’s business
and measures are in place to monitor progress? Are these
strategy.
criteria embedded in the organization and linked to employee
evaluation and compensation systems?
These questions are not easy to answer. But as the experiences of
the financial services institutions presented in this report
24
demonstrate, firms that make the organizational commitment to
design, implement, and monitor a strategic cost reduction
program can achieve dramatic increases in efficiency. Financial
services firms that adopt a strategic approach to cost reduction
that goes far beyond layoffs will not only survive the current
economic slowdown, but emerge as leaders in the years ahead.
 Deloitte Research – Strategic Cost Reduction
End Notes
1
"Layoffs Can Hurt Firms More Than They Help; Beware of
Damage to Staff and Customer Trust," The Wall Street
Journal Europe, February 22, 2001.
2
“Uncertainty Inc.,” The Wall Street Journal, October 16, 2001.
3
Strategic Flexibility in the Financial Services Industry: Creating
Competitive Advantage out of Competitive Turbulence,
Deloitte Research, 2001.
4
“So long, banker,” The Economist, October 27, 2001.
5
"Advertising Budgets Escape the Knife," U.S. Banker,
February 1, 2002.

25
 The Deloitte Research Strategic Flexibility Initiative
Deloitte Research has been developing the concept of strategic flexibility for over two years. Through a series of
industry-specific research reports and other publications, Deloitte Research professionals have created a body of
work that articulates the four-phase strategic flexibility framework and demonstrates its usefulness in a wide range
of applications.

Many of the items below are available from Deloitte Research at www.dc.com/research or upon request at
delresearch@dc.com.

Deloitte Research Studies Other Publications

Strategic Flexibility in the Financial Services Industry: Creating
competitive advantage out of competitive turbulence
Strategic Flexibility in the Communications Industry: Coping
with uncertainty in a world of billion-dollar bets
“Real Options in Real Organizations: Creating and exercising real
options through corporate diversification.“ Chapter 2 in
Innovation and Strategy, Operating Flexibility, and Foreign
Investment: New Developments and Applications in Real Options.
L. Trigeorgis (ed.) Oxford University Press, 2002

Strategic Flexibility in the Energy Sector: Competing in a decade

“Real Options and Restructuring the Communications
of uncertainty, 2000-2010
Industry,” Telecom Investor, December 2001

Strategic Flexibility in Life Sciences: From discovering the

“Lead from the Center: How to manage divisions dynamically.”
unknown to exploiting the uncertain (forthcoming)
Harvard Business Review, May 2001

Strategic Flexibility in the Media Industry: Real options in the

“Tracking Stocks and the Acquisition of Real Options,” Journal
pursuit of digital convergence (forthcoming)
26 of Applied Corporate Finance, Summer 2000

“Hidden in Plain Sight: Hybrid diversification, economic

performance, and real options in corporate strategy,” in Winning
Strategies in a Deconstructing World, J. Wiley & Sons, 2000
 Deloitte Research – Strategic Cost Reduction
Recent Financial Services Industry Thought Leadership
■ Top 10 Global Banking & Securities Trends 2002
■ Top 10 Global Insurance Trends 2002
■ Reinventing Financial Services: Succeeding with Corporate Transformation
■ Strategic Flexibility in the Financial Services Industry: Creating Competitive Advantage out of Competitive Turbulence
■ Leaders and Laggards: How Pensions Reform Will Drive Change in the European Long-Term Savings Industry
■ Shaken or Stirred: Understanding the Coming Revolution in German Retail Financial Services
■ Myth vs. Reality in Financial Services: What Your Customers Really Want
■ Competing for Your Customer: The Future of Retail Financial Services
■ The Road Ahead: An ECN Industry Outlook
■ Solving the Merger Mystery: Maximizing the Payoff of Mergers & Acquisitions
■ Risk Management in an Age of Change
■ Will the Securities Industry Meet Its ACID Test? Automation–Consolidation–Internationalization–Diversification
■ Top 10 Real Estate Capital Markets Trends 2002
■ Top 10 Private Equity Trends 2002
■ Online Securities Trading Survey 2001

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