3 minute read 18 Jun 2020
Business man working on computer

How CFOs can cut expenses to ride out the downturn and pursue growth

By Matteo Polvara

Senior Manager, CFO Consulting, Ernst & Young LLP

Experienced Senior Manager in CFO Consulting practice. Focused on profitability insights, management reporting and cost allocation for financial services.

3 minute read 18 Jun 2020

COVID-19 has proven that macroeconomic events can change faster than most organizations’ modeling capability can keep up with.

With the economy facing an extraordinary range of outcomes, CFOs are called to simultaneously cut expenses while preparing to foster growth. However, most organizations found themselves responding to the toughest leadership test of a generation through a mix of aging technology, siloed profitability models and overly complex data supply chains that drive inadequate data quality. CFOs should look at COVID-19 as a wake-up call and invest in advanced profitability insights.

Financial institutions (FIs) are navigating the toughest leadership test of a generation.With the US economy on  ‘pause,’ and an impending wave of defaults, asset withdrawals and business interruption insurance payouts, it is imperative for FIs to rapidly cut expenses and build reserves. However, FIs should also adjust to the operational challenges brought on by significant increases in remote working, and mobilize to manage spikes in COVID-19- related volumes (e.g., small business loans, revolving credit facility utilization and forbearances). Finally, FIs should be ready to quickly pivot back to fostering the growth agenda when the ‘whatever-it-takes’ monetary policies of central banks open opportunities for profitability.

In contrast to the great recession of 2008, FIs are in far better financial shape. However, the outlook is negative. FIs should improve their decision-making and incorporate advanced profitability insights.

FIs need to understand the real profitability of their business and product mix in order to enable portfolio optimization; understand cost dynamics in the event of product and business exits; and surgically target investment on product, customer acquisition and retention to protect stakeholder value and the institution’s role within communities.

FIs need to modernize their profitability capability to identify actionable cost-cutting levers; optimize their product and business mixes; and isolate which products, customer segments and markets to continue investing in while awaiting the economy recovery.

Leaders of FIs should follow the playbook for advance profitability insights:

  • Avoid harming profitability while playing defense
  • Drive consistency through a subscription-based approach
  • Model cost dynamics and estimate impact of business events
  • Enable finance on demand
  • Build demonstrable trust in data
  • Bolster the data supply chain
  • Embed profitability insights into day-to-day business processes and decision-making fabric

What financial institutions should do now, next and beyond  

Organizations need to focus on outcomes, rather than mechanics, as they build tactical  reports that make better sense of existing data. The output should be used to guide the  path toward a sustainable “engine room” where profitability insights are generated  efficiently and are embedded within the decision-making fabric of the organization.

What to do now: Make better sense of existing data

What to do next: Build a sustainable ecosystem

What to do in the beyond: Adopt innovative growth drivers

The economic and market dynamics triggered by the pandemic will likely separate financial institutions between the “best” and the “rest” and with investment budgets being reduced, non-essential change initiatives being delayed, financial institutions cannot proceed by trial-and-error.

Organizations need to use business insight generation to prepare for predictable future scenarios and be enabled to react instantaneously to unforeseen ones.

Business insight generation should be embedded within the decision-making fabric of the organization and allow to simulate the impact of, and prepare for, predictable future scenarios as well as enable the organization to react instantaneously to unforeseen ones. 

This article shares considerations and levers on how to improve profitability insights, which are geared to yield immediate results, while, at the same time, advancing the broader profitability modernization agenda.

Download this report (pdf) to find out more.

Summary

The COVID-19 pandemic has afflicted financial institutions compounding on their pre-existing conditions, such as antiquated technology, silo models that prevent consistent enterprise views, data latency causing models to run with data that often has at least a one-month lag, and the lack of user-friendly interfaces available to finance analysts to run instantaneous scenario analyses.

About this article

By Matteo Polvara

Senior Manager, CFO Consulting, Ernst & Young LLP

Experienced Senior Manager in CFO Consulting practice. Focused on profitability insights, management reporting and cost allocation for financial services.