This way, only the necessary portion of the report survives. It also meant evaluating the organization structure and the current degree of digitization. Start now! Many merchant and investment banks, those that serve corporations rather than individuals, may finally be ready to act on an often-repeated, but not quite accepted, maxim of the industry: There is no going back to the way things were. These issues are generally addressed as operating … Taking a tailored approach will allow opportunities that offer the highest value  to be identified quickly and prioritized. Some common examples of overhead costs are rental expenses, utilities, insurance, postage and printing, administrative and legal expensesSG&ASG&A includes all non-production expenses incurred by a company in any given period. The largest opportunities should be prioritized, of course. Digital technologies and other advances, such as artificial intelligence (AI) and robotics, promise to change this—radically. And, in part, it is. allocation bases are used to assign support or overhead costs to cost objects (Drury, 2012). All rights reserved. But this should not prevent bank leaders from reimagining the future and making bold bets. Managing Director & Senior Partner, Leader Business Transformation Suite. Cost allocation problems emerge in many real life situations, such as hospitality operations, in which individuals, for a variety of reasons, decide to work together (Tijs and Driessen, 1986, Patiar and Mia, 2008a, Patiar et al., 2012, Patiar, 2016). • Experience in the Financial Services industry is a plus. By not adopting them quickly to effectively cut costs and improve the customer experience, incumbents may cede ground to competitors—many of which will be fintechs—and go the way of bookstores. The bank’s decision-making capabilities should also advance, because making these improvements requires clarifying roles and responsibilities. • Bachelor’s degree in Finance or Accounting • MBA, CFA or CPA a plus. In short, adopting new technologies allows banks to overcome the tradeoff between providing good service and minimizing operating costs. If costs are allocated to the wrong cost objects, the company may be assigning resources to cost objects that do not yield as much profits as expected. 2. Cost allocation is the process of identifying, accumulating, and assigning costs to costs objects such as departments, products, programs, or a branch of a company. The following are some of the reasons why cost allocation is important to an organization: Cost allocation provides the management with important data about cost utilization that they can use in making decisions. Economic Capital Allocation with Basel II: Cost, Benefit and Implementation Procedures - Ebook written by Dimitris N. Chorafas. • 8 or more years of cost allocation/financial analysis experience. By combining this analysis with management interviews, priorities for improvement quickly became evident: Implementing these changes alone is expected to reduce the bank’s total annual costs by more than 7%. The compensation of business unit managers should then be linked to meeting KPI targets. Of course, most end-to-end processes cut across business units. But it is also a managerial challenge. This may include things such as labor, raw materials, or consumable supplies. Implementing these initiatives is expected to improve efficiency in the respective units by about 25% and reduce the bank’s total costs by 4%. This requires the cost reduction team to include people with a solid understanding of the economics of each business line. It is typically among the largest expenses that, fuel consumption, and motor vehicle maintenance. The analysis identified more than 50 initiatives that the bank could undertake to automate back-office processes and expand online services. Different lines of business have different efficiency drivers. CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)®FMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari certification program, designed to transform anyone into a world-class financial analyst. The bank set its goals and then applied the second rule of cost excellence, conducting an assessment of each business segment. Fee income is being constrained by tighter consumer protection regulations and by increased competition from new market entrants—often fintech players with low-cost digital offerings in market niches, such as payments. These costs include: The company should also determine the cost allocation base, which is the basis that it uses to allocate the costs to cost objects. They can improve efficiency not merely by 5% here or 10% there; they can make processes a thousand times faster and reduce marginal transaction costs to zero. The two concepts match up when the realised (accounting) returns equal the investors’ expected returns. INTRODUCTION. Therefore, data on the return on equity may be informative about the cost of equity. To help financial institutions pursue cost cutting without being derailed by complexity, we have applied BCG’s complexity- management framework, Smart Simplicity, to cost management. ECRI Research Report No. The task is inherently complex. The cost object can be a brand, project, product line, division/department, or a branch of the company. BCG was the pioneer in business strategy when it was founded in 1963. At a time when the number of strategic challenges facing the banking industry seem overwhelming, prioritizing what needs to be focused on is an important exercise. A rigorous and transparent process should set an annual budget and then break it down across the organization. Uncertainty about the effects of the pandemic will likely remain for the foreseeable future. The costs are first identified, pooled, and then allocated to specific cost objects within the organization. Discontinue the report and see what breaks; then fix only what is broken. When does the expense of perfecting the model outweigh the benefit? BACKGROUND. Cost of production refers to the total cost incurred by a business to produce a specific quantity of a product or offer a service. This included assigning all employee time to process steps to get an accurate picture—without overlaps or omissions—of where labor costs were being incurred. During this period a public hearing was also held. A Strategic Approach to Cost Efficiency In the Banking Industry Boosting profitability amidst new challenges OR ACL E WH IT E P AP E R | S E P T EMB E R 20 17 . Boston Consulting Group is an Equal Opportunity Employer. Old processes must sometimes be maintained even after new ones have been developed. A model fit for the digital era? To find out what the most important priorities will be in 2017, the Digital Banking Report surveyed over 500 financial institutions globally as part of the research done for the 2017 Retail Banking Trends and Predictions … When examining costs that arise from interactions with customers and suppliers, banks should look beyond their boundaries. cross the banking industry there are two popular operating models for tackling intercompany expense issues. COST ALLOCATION ISSUES IN A SERVICE INDUSTRY . These advances are an opportunity for incumbent banks, but they are also an existential threat. Margins have been narrowing as a result of persistently low interest rates. The other category of indirect cost is variable costs, which vary with the level of output. Real-time cost allocation would solve many of those issues but exacerbate another one – the high cost of precision. It is intended for information purposes only, and may not be incorporated into any contract. Cost allocations can also be used in the derivation of transfer prices between subsidiaries. An experimental approach can be helpful in such situations. When costs are allocated in the right way, the business is able to trace the specific cost objects that are making profits or losses for the company. In recent years, there has been much hype that banks will soon experience a dramatic loss of market shares. So targets must be set not only for organizational entities but also for entire process chains. Although we present some factors to consider in selecting cost-allocation methods, there are no easy answers. 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