Cost Management: to Build or not to Build, That is the Question

In our focus of assisting companies to make better business decisions, it has become apparent that every few years the focus in financial services is centered on the merits of branches as effective sales and service platforms. In our experience, this same discussion around the seemingly constant expansion of financial services stores (branches) could easily be applied as well to various retail businesses and service industries which have a real or perceived need for a physical presence.

As technology and consumer preferences also continue to evolve, we believe one should question the economics and need for an aggressive physical expansion strategy across these varying industries. This analysis can be just as insightful for a retail, healthcare and higher education facility as it is for the neighborhood branch of a financial services company.

It is easy to understand the historical focus on expanding physical presence to drive revenue growth. For most of our collective career experience, this strategy has worked quite well in an environment of declining cost of capital, ample credit, and favorable borrowing costs. Our view is that we are experiencing a paradigm shift in the global economy that will result in higher costs to build (higher cost of capital/borrowing costs) and operate physical locations, coupled with a difficult environment to generate much in the way of pricing power.

Many financial services companies are in the eye of the coming storm with vast physical distribution networks and increasingly scarce revenue growth opportunities. We believe strategic cost management is a necessary capability to not only weather the storm, but to prosper. It will be increasingly important to understand how customers are consuming products and services by various distribution mechanisms. Strategic uses of more effective management information include how to allocate financial and human capital to business lines, products and customer segments with the highest return. More tactical benefits include rationalization of the branch delivery network and appropriately pricing products and services.

Strategic cost management provides a framework to understand overall capacity and how to more effectively utilize available capacity. Strategic cost management also provides additional insight on how to more intelligently grow or reduce capacity as needed to better align with the needs of your customer base. We feel many of the benefits of strategic cost management are applicable to understanding not only the recent question of branch strategy in financial services, but highly valuable in your business as well.

Tags: , , , ,