Financial Transparency: Banks Can’t Ignore IT Cost in Their Profitability Reporting

Financial Transparency: Banks Can’t Ignore IT Cost in Their Profitability Reporting

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There are still a few bankers who can recall a time before immediate access to data, real time transactions and 24/7 service. This was a time when banks would often ignore the impact of shared services and IT on their profitability and performance measurement.

In the early days of my banking career, I managed a large consumer lending office in the branch network of mid-size regional bank.  In those days you predominately operated on an island, with the autonomy to make decisions, but with limited information that was dated by at least 24 hours, if not a week or a month.  Waiting for the courier to arrive with those green bar reports to learn what happened yesterday or last week, left you disconnected from the IT and operations organization.

However, being disconnected also meant that you could not be held accountable for the spend of those organizations.  Service allocations were typically a single line item in your “below the line” indirect expenses that were not included in the performance review of your organization.  Today that paradigm has shifted, and shared services and IT are very much a part of how banks deliver products and services to their customers.

Over the past twenty years or so banks have invested considerable time and effort to centralize and automate as many functions as possible, however, many organizations continue to live in the past and separate front and back office expenses. This distinction is increasingly less meaningful if bankers want to understand the true profitability of various organizations, customers and products.  Bank management must understand the impact that technology expense is having on their profitability.

Since 2008 the banking industry has focused on cost management and slashed their operating budgets. Many banks have searched for efficiencies through automation, consolidating operations and branch rationalization initiatives.  Particularly the retail bank, what was once a decentralized organization is evolving into a more homogeneous and consolidated environment.  To support this evolution, improved cost information is driving better management reporting to understand the organization’s dimensional profitability.

For the last few years automation and development of alternative delivery channels have become a primary focus of most banks placing the spotlight squarely on IT.  Worldwide in 2014, banks are expected to spend over $215 billion on their IT organizations, which is approximately half of all IT spending in the financial services sector.  In the US, while most areas in the bank are still looking for areas to reduce spend, the IT budget is expected to grow by and annual rate of 4.2% to 5.0% over the next three years.  Most banks are expecting to see a continued increase in their operating budgets to keep pace with the increased demands for alternative delivery channels.  The American Banker projects the top areas of IT spending in the near future, will focus on; online Banking and Mobile Payments, Marketing Analytics and Data Management and the continued integration of delivery channels across the banking platform.   This data leads to two indisputable conclusions regarding bank profitability:

  • Technology will continue to grow as a percentage of total organizational spend and will be a strategic leader for banks.
  • Bank management will have to understand the impact of technology spend on the profitability of their customers and products to make informed tactical and strategic decisions.

Alternative delivery channels are increasingly critical to account acquisition and servicing, and the role of the branch will continue to evolve based on this shift.  Financial data from the technology organization will have to be translated into meaningful financial information for both the technology group and the business owners.  The CIO and the CFO must cooperate in driving change that will provide both sides with the financial information they need, the right methodology to deliver that information and the toolset to support this transformation.  The production cost of IT should be driven to application cost pools based on the consumption of IT resources by the applications supported.  Customer facing application costs can be driven directly to product profitability through a transactional unit cost based on customer usage.  Service and core application costs can be driven to the owning business units and embedded in their profitability reporting.

The profitability system should also provide the ability to track costs back from the end point to the originating organization, providing the financial transparency that most organizations are striving to obtain. Understanding IT costs and aligning them appropriately is increasingly important as banks continue to struggle with tactical and strategic decisions about how to efficiently use their delivery channels.

IT spend required to support the increased automation of processes and delivery channels are by nature larger in scale, longer term, and often less flexible than traditional resources. Banks can’t install and uninstall systems nearly as quickly as they can increase or reduce tellers, sales force, or back office personnel. Understanding excess capacity, step functions of investments, and fixed vs. variable expenses are more important than ever as the supporting infrastructure of banking shifts towards IT.

While banks have made a considerable investment in understanding the various dimensions of profitability, many have been unable or unwilling to invest the time and effort to understand IT cost.  With the growth and importance of IT to the organization this will not be a sustainable approach for banks.  Technology is clearly a part of the cost equation that must be measured and analyzed to understand bank profitability, and it can no longer be ignored.

Activity Based Costing: Below-the-Line becomes top of mind for cost improvement

Activity Based Costing: Below-the-Line becomes top of mind for cost improvement

TechnologyCostsCompanies interested in improving overall margins are now focusing on below-the-line cost efficiency as a means for cost improvement. Also referred to as shared services or overhead costs, these “allocated” costs represent a growing share of the overall expense base. For years, the process of simply allocating these costs to the revenue generating functions of the business has been ignored as an uncontrollable cost of doing business. Companies are now realizing benefits of conducting cost studies on back office functions and billing internal organizations based on these services.

IT Cost Recovery leads the way
Trends in aggressive cost management of back office functions began with the rising costs of IT departments. The proliferation of technology throughout the enterprise resulted in rising costs with minimal transparency into the causal drivers of IT expenditures. Traditional allocations provided no capabilities for management to gain insights and take the necessary actions to reduce consumption of IT resources. Success in developing more sophisticated chargeback processes based on usage brought managers from across the enterprise into a more productive, even collaborative dialog around IT cost control. Now, the methodology is gaining momentum across all shared services and back office operations departments, providing a Profit and Loss (P&L) reporting view to managing non-revenue generating business units.

Activity Based Costing is key
These efforts can be complex and the corporate politics involved can be treacherous. Few finance functions are as contentious as the assignment of costs to managers that do not directly control the budget. Successful adoption requires a fair and consistent methodology that provides credible and actionable information. Activity based costing provides the best approach to accurately provide cost transparency to management. Activity based costing lost ground in the ‘90s as a methodology, due to manually intensive data collection and implementation complexity. The emergence of big data, improved technology, and increased demand for cost analytics have given new life to the method. Implementations are taking weeks instead of months and providing immediate cost savings, often self-funding the project investment.

Costs are the most controllable part of the profit equation
Today, companies are able to leverage advanced cost modeling systems to provide detailed cost analytics that not only provide insights into the drivers of profitability in their business, but also identify and eliminate unnecessary costs. With increased regulations, competitive markets, and economic uncertainty decreasing top line revenue growth, below the line cost improvements can drive much needed bottom line results.

If you are interested in learning more about Cost Modeling or Strategic Cost Management, contact Armada Consulting here.

Armada Launches Cost Analytics Software

Armada Launches Cost Analytics Software

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Tulsa, OK (PRWEB) July 28, 2014

Armada Consulting, a national cost management consulting firm, announced today the launch of a software business division aimed at delivering cost and profitability analytics into any organization.

The company’s initial software offering is Acumen Cost Analytics, an enterprise-scale activity based cost modeling application.

Acumen helps companies assign expenses to measure profitability across customers, products, organization units and channels. With these advanced cost analytics, Armada clients are able to contain costs, reduce expenses and redirect human and financial capital to the most strategic purposes.

“By creating a new and dedicated software business, we’re demonstrating our commitment to driving innovation in a niche of business analytics often lost on the market’s leading vendors,” said Scott Wise, managing partner of Armada.

Armada consultants have been using a version of Acumen for years in their cost management engagements. The new software business answers the call from clients for a licensed version they can use to impact the bottom line on an ongoing basis.

“The analytics that Acumen can provide are essential to our growth strategies and to our remaining one of the nation’s strongest, safest banking organizations,” said Jeff Barno, senior vice president and financial planning director for Hancock Holding Company. “We are a multi-billion-dollar financial services company with a business footprint across a major U.S. economic region—the five states encircling the Gulf of Mexico. We selected Acumen to provide an advanced level of cost transparency to drive better business decisions and ensure we can optimize our client experience, profitably.”

Historically aimed at the financial services industry, Armada’s consulting business has grown due to renewed emphasis on costs as the most controllable part of the profitability equation. With the launch of Acumen as a licensed software offering, Armada is eager to bring the same success to clients across all industries.

“Financial Services is a very diverse and complex industry that desperately needed improved cost analytics,” said Wise. “Our experience in modeling these complex organizations provides us the confidence that we can deliver cost transparency to clients in any industry.”

For more information about licensing Acumen Cost Analytics, visit ArmadaSoftware.com.

About Armada

Armada is a management consulting firm solely focused on delivering analytics that drive better business decisions. With a track record of delivering results to many of the premier corporations in the world, Armada’s vision is to be the most sought after firm in the world recognized as an innovator in cost and profitability analytics by developing the tools, talent and technology that continuously improves corporate financial performance.

Armada Consulting Announces Cost Management Benchmark Survey Findings

Armada Consulting Announces Cost Management Benchmark Survey Findings

Armada Consulting Announces Cost Management Benchmark Survey Findings

DOC-150x150Armada Consulting is pleased to announce the completion of the inaugural Cost Management Benchmark survey for Financial Services companies.  The survey achieved the objective of providing current information on the state of cost management in Financial Services companies representing a cross section of participants including commercial banks, community banks and credit unions.

Participants ranged in size from well over a Trillion in assets to under $300 million.  Regardless of asset size, respondents were fairly advanced in cost analytics with the vast majority rating their capabilities as intermediate or advanced. Despite the respondents being fairly advanced, the vast majority at best had only doubled their investment to date in cost analytics.

We believe Strategic Cost Management is one of the most controllable components of the profitability equation for many industries and survey results suggest many Financial Services companies are challenged to deliver an effective return on investment for their efforts. The survey also confirmed that a successful Cost Analytics framework is one that drives business value and is highly correlated with unit cost methodology, capacity analysis and a standard management reporting approach.  The integration of cost management information into the reporting and planning process was also a strong contributing factor to the success of the overall performance management effort.

The survey confirmed our belief that a successful Cost Analytics framework is not correlated to size of cost analytics investment, use of a dedicated system or asset size of the institution.  Shared Services and IT chargeback mechanisms also contributed to a successful Cost Analytics framework for the majority of companies surveyed.

Many industry contacts and a majority of the respondents indicated an interest in more detailed cost management benchmarking efforts leveraging a standardized approach. Branch economics were the most desired topic for potential further benchmarking efforts along with IT cost transparency and shared services.  Armada Consulting will continue our effort to be a premier provider of Strategic Cost Management solutions by expanding our Financial Services research and potentially leveraging our experience across other service oriented industries.

If you have any questions or if you are interested in participating in current or future survey efforts please contact me at Brad.Anderson@Armadaconsulting.com.

Achieving Strategic Cost Management for Profitable Growth

Achieving Strategic Cost Management for Profitable Growth

Achieving Strategic Cost Management for Profitable Growth

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Market challenges driving increased need for cost analytics

As economic uncertainty continues to drive demand for advanced cost analytics, Finance is now faced with the challenge of providing front line management with detailed business analytics that will enable increased expense control, improved operational efficiency and more effective pricing strategies. Many organizations are taking a renewed interest in expanding cost management beyond the confines of Finance by engaging the enterprise on a collaborative effort for cost control and accountability.

Adding to the challenge is the fact that most Finance teams were hit hard with headcount reductions over the last couple of years and now lack the resources and capabilities to meet current demands. Finance professional are anxious to move from the daily firefighting role thrust upon them by resource constraints and re-engage on more strategic initiatives for cost and profitability measurement. As the demand continues to grow, I am often asked “How do we get started to quickly deploy a better cost solution at our company”?  I have found that starting is the hardest part, but below I have outlined four critical components to successful Strategic Cost Management and one shameless plug on why you should engage Armada to help.

How to get started

Re-evaluate Cost Assignment Methodologies and Assumptions

Move away from legacy expense allocations and towards more consumption based cost assignments by leveraging operational statistics captured in core applications and data warehouse facilities. Focus efforts initially on traditionally non-controllable or indirect expense allocations from back office and shared services to foster the productive cost dialogue around consumption and accountability of shared costs. We recommend performing a thorough assessment of internal capabilities against Armada’s Cost Modeling Maturity Matrix both from a data and a resource perspective to examine internal capabilities to deliver value to the enterprise.

Design an Integrated, Sustainable Framework for Strategic Cost Management

Most organizations fail to advance cost management beyond modeling and measurement, stuck in a perpetual production environment of unit cost data often ignored across the enterprise. Armada’s SCM Blueprint focuses on enterprise adoption by integrating centrally governed cost information into continuous improvement, planning & forecasting, predictive modeling, and multi-dimensional profitability analytics. Our framework provides a structured approach for navigating beyond finance through collaboration with operations, product management and executive leadership, creating a sustainable program that balances current capabilities with future incremental improvements.

Leverage ABC for Modeling Business Economics and Realizing Immediate Operational Improvements

Organizations cannot achieve true cost transparency with subjective management surveys of high level operational processes. Gain credibility by avoiding finance centric “ABC Lite” cost studies, leveraging Armada’s Cost360™ approach for conducting thorough operational cost analysis and modeling. Prioritizing areas of urgent cost concern will gain management support and provide immediate operational improvement to self-fund continuous improvement initiatives.

Invest in Technology and Enterprise Governance

Methodology should drive technology decisions. Strategic Cost Management is a complex endeavor for any organization, requiring careful examination of requirements and thorough design documentation before investing in software. Armada supports our client’s selection of supporting software by conducting Rapid Prototyping of their subscribed methodology to uncover obstacles and drive a better set of business requirements. Armada can quickly deploy our Acumen cost analytics software as a proof of concept for evaluating business requirements or as a permanent solution for advanced cost analytics.

Engage Armada Consulting to Develop the Right Strategic Strategic Cost Management Solution for Your Organization

Armada has assembled the best and brightest individuals focused on maximizing our client’s return on enterprise Strategic Cost Management project investments. Our team works closely with clients to better understand their unique cost challenges and provides experienced professionals to assist in the design, development and delivery of substantial cost improvements. Armada differentiates itself against other consulting firms by providing clients with: