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Cost allocation excellence

Sustainable cost leadership as a competitive advantage for financial institutions

Are you really in control of your infrastructure cost base? Can you afford not to be?

Financial Institutions continue to face challenges in managing their enterprise-wide infrastructure costs. In most cases, they lack cost transparency and actionable insights.

By sustainably reducing or eliminating infrastructure costs, financial institutions can be leaner, more agile and poised for growth in today’s changing economic and regulatory environment. They will be better positioned to free up working capital and reallocate funds they saved to invest in products and technologies to defend or grow market share.

To this purpose, financial institutions should position themselves to manage costs effectively during the financial planning cycle rather than waiting until actual costs have been posted, when reduction levers might be either no longer available or effective in the desired timeframe.

Contact us

Steve Krueger
Principal, New York
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Matt Polvara
Senior Manager, New York
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Infrastructure costs account, on average, for 40% of a large global financial institution’s cost base.

When it comes to managing the infrastructure cost base, financial institutions can find themselves caught up in the academic exercise of cost accounting and allocation, moving costs from one side to the other within the organization, rather than focusing on an objective of controlling or reducing the overall cost base of the enterprise.

We often see this process creating significant internal friction due to the lack of cost transparency, in particular around consumption data and billing rules. Most financial institutions spend too much time and too many resources investigating and managing allocation disputes, which runs counterintuitive to the cost-cutting they seek. This also distracts the organization from what really matters: optimizing the enterprise-wide cost base.

We understand the challenges you face:

  • Unclear, and often conflicting, cost accountability models, resulting in organizational friction around who owns which costs rather than collaborating to reduce the enterprise cost base
  • Complex allocation methodologies that do not reflect the way the service recipient manages its business
  • Insufficient actionable cost insights, resulting in an inability to identify cost drivers and reduction levers, and to understand how changes in consumption behavior can lead to cost savings
  • Multiple and conflicting methodologies creating inconsistent enterprise views of costs, challenges on cost transparency and spend accountability
  • Cost analytics do not cover the entire cost base and impair forward-thinking cost management

If not addressed, these challenges typically lead to:

  • Reduced margin and enterprise value
  • Lower available liquidity due to higher working capital required to comply with living wills
  • Higher regulatory capital requirements due to conservative assumptions on CCAR’s pre-provision net revenue (PPNR)

If we get transparency, cost reduction follows.”– CFO, enterprise staff functions at a large US bank

Self-assess your cost management capabilities by asking these questions:

  • Are we actively managing costs before they are committed?
  • Are we producing cost reporting that has the right level of detail?
  • Are we managing cost or only expenses?
  • Are we simply reporting numbers or generating actionable insights?
  • Are we reducing costs as part of our cost management routines or only as one-off exercises?
  • Do we have a game plan for continuous improvement or transformation of our cost allocations?

It is not about making my slice of the pie smaller, it is about making the whole pie smaller.”– Senior financial executive at a leading European bank

We recommend 11 management principles to transform the way organizations manage and optimize infrastructure costs:

  1. Governance. Adopt an overarching governance practice to pursue bank-wide objectives as opposed to silo-based solutions.
  2. Strategic execution. Create a costing center of excellence to orchestrate efficiencies and bank-wide consistency.
  3. Service catalog. Adopt a common taxonomy to improve dialogue across the organization and focus on bank-wide goals.
  4. Methodology. Balance simplicity and the need for cost insights through a tailored costing methodology.
  5. Drivers. Adopt unit costing with allocation drivers linked to business fundamentals.
  6. Data. Refocus annual spending to improve data management at the source as opposed to investing in a series of point solutions.
  7. Technology. Leverage advancements in technology to increase cost transparency while minimizing disruption to current processes.
  8. Cost analytics. Focus on generating actionable insights rather than just reporting numbers.
  9. Financial planning. Manage the allocated cost base within financial planning and business reviews.
  10. Resolution and recovery planning. Leverage cost allocation to minimize the pre-funding required for operational continuity.
  11. Tax and regulatory compliance. Factor tax and regulatory constraints into management of shared services to avoid erosion of operational efficiency due to unforeseen tax and legal entity complications.

To be effective in cost management, you really need to understand the driver and the origin of the cost.”– Finance executive of a leading international banking group

What can you expect from EY teams?

Thought leadership
We provide differentiating thinking and views on leading practices, emerging trends and innovative approaches, to design and deliver top-tier strategic cost management transformations.

We introduce robust accelerators and toolkits consistently across the implementation life cycle to expedite timelines and minimize project execution risks.

We offer access to market data for comparative analyses of operational and financial metrics to identify efficiency opportunities.

Global network
We bring a connected global network of costing specialists that are dedicated to financial services and that are accustomed to working on cross-border transformation programs for large, international financial institutions.

Here are some examples of our services:

  • Rapid cost diagnostics
  • Cost allocation transformation
  • Cost and profitability analytics
  • Activity-based costing
  • Technology architecture review
  • Technology design and implementation
  • Cost benchmarking and spend analytics
  • Cost allocation support for regulatory compliance