Challenging The Cost Centre Mindset

Creating the case for change can be challenging where the impacted areas operate within a traditional cost centre mindset. Management agendas are typically dominated by prescriptive, cost-based metrics which can stifle transformation where the gains appear marginal. This is increasingly the case where cost arbitrage has led to a migration of processes to lower cost locations, as although driven by scale, quality and cost of resources actually creates a disincentive for transformation. Further, this issue is often then exacerbated by the low relative cost of the underlying legacy technology that supports the process. Counter-intuitively this often results in it becoming cheaper for a cost centre to maintain manual processes than it does to automate them.

Whilst this may seem illogical, the reality is that where cost centre objectives dominate post trade management agendas it creates a powerful disincentive for change. One where even a 30% reduction in headcount isn’t material enough to justify investment in automation. And unfortunately, an increasingly common riposte amongst functional process owners who realise that they have little opportunity to compete for scarce investment spend. But given the shock to the financial system that COVID-19 created and the subsequent focus on operational resilience by regulators and boards means the C-suite may find this is no longer purely a cost driven decision. This may well result in the need to think differently about creating a broader case for change across middle and back office.

The ongoing cost challenge that most banks within capital markets continue to grapple with – fundamentally, that the cost of processing their business is too high – means that they have to organise and incentivise differently to be successful. The key to success is solving this challenge ‘front to back’, not relying on individual functional agendas to deliver piecemeal change. This is difficult for banks to do, as it requires bringing leadership and expertise together across front, middle and back office – which is typically not straightforward. And it then requires change management disciplines to be effective, which often fails due to underestimating the organisational complexity of orchestrating and executing even simple front to back change.

But for organisations that are able think outside of the traditional cost-focussed agendas that they have been constrained by, the ‘juice’ from transformation can be material to their business models.

Here is how:

  • Challenge Functionally Led Change. Continuing to feed individual functional change agendas (operations, finance, risk) with resources is locking in sub-optimal returns. Allowing functions to maintain their functional independence reinforces these boundaries and disincentivises cross-functional collaboration on shared agendas. There is no incentive to change and no incentive to think differently about the problem. Leadership must be bold by turning off the tap for the old way of doing things and forcing change to act differently.
  • Understand The Customer. The customer is still viewed as a front office responsibility within banks, with traditional functional leadership across middle and back office focussing on cost and risk management. Understanding their role in the value chain and taking responsibility for their impact to the customer journey will require a fundamental mind-set shift for functional heads. But it is one they must be incentivised to adopt in order to understand how to energise transformation cross functionally – not just within the domain they own.
  • Data Is An Asset, Not A Problem. Most banks see data as a problem, which drives their workload and is a significant cost to be managed (think reconciliations, data integrity checks, multiple data stores). But for organisations that have been transformative within service sectors, data has been front and centre of their success. Data is such a broad topic within banks that it can be hard to quantify (think risk data, market data, reference data) but the fundamental challenge is that is seen as a cost to be managed, not a resource to developed. Greenfield thinking has its place here, whereby leaders should think about how they would define the data sets needed to build and run their processes efficiently – not be constrained by the data available to them now. This can enable them to become data eloquent, where they shape their transformation agenda through data quality enhancement, not cost reduction.
  • Know The Competition. Being a monopoly supplier (which middle and back-office functions are) negates the need to care about competition. But this creates the wrong type of dynamic, focussing on internal agendas that are self-serving rather than seeking out opportunities for excellence. Many great businesses become great because they understand who is best in class in their particular field and seek to be better than them. This rarely, if ever, makes its way into an investment pitch for post trade automation in banks – when given the criticality of the process to the customer experience it should be a major component of the business case. The industry is trending slowly towards standardisation through adoption of third-party services (infrastructure providers such as Acadiasoft or Access Fintech as examples), which bring with them rich data sets that support peer comparison. So rather than focussing solely on internally motivated agendas – such as meeting the CFO budget haircut – incorporate competitor or peer analysis into post trade strategy. Ignoring the technology and data driven opportunities that digital transformation open up will be terminal for the C-suite leaders, who must adopt a more commercially focussed mindset when viewing what have traditionally been seen as cost centres to be squeezed.
  • Don’t Ignore The Soft Stuff. Soft benefits (client service, better resilience, improved controls, data driven insights) historically haven’t quite cut it when creating business cases. They are nice to have, but cost centres are typically viewed through a narrow lens of cost management – with anything else being seen as the supporting cast. Data insights can be hugely valuable in optimising post trade systems and processes, but are rarely available. And making a benefit case around ‘not having something’ is very difficult to quantify for traditional investment committees who have always operated in the same way. Outside-in thinking can be of benefit here, but even where this brings best practice from elsewhere (such as Chief Data Officers from data driven industries) it can still be tough to be transformational. However these factors are key considerations for driving transformational change, where low hanging fruit has been harvested and the case for transformation needs to be made. The winners in post trade will be those that are able to articulate the value of driving a data and technology enabled business – not one which is 5% cheaper than last year to run.