Several years have passed since the beginning of the current recessionary economic cycle. By many estimates, trillions of dollars have been spent worldwide to attempt to jump start the business cycle. In the United States and in many other western countries, this spending has caused a very real risk to sovereign finances. From our viewpoint, it appears that in many cases institutions have not done enough to write down bad debt or increase capital.
We would argue that we have learned over the past several years that below market interest rates and monetary expansion potentially have dangerous side effects. Look no further than the price of oil, food, and other essential commodities for evidence that central banks simply cannot “print at will” without very real economic consequences. Many would argue that there is an effective limit to monetary expansion and that these policies are showing diminishing returns as of late.
We live in a highly interconnected global economy and the impact to Europe and other world economies will be significant as these challenges are resolved. In the US and many areas of the world, financial services companies will operate in an environment of deleveraging and regulatory scrutiny not seen in many decades.
The political environment and macroeconomic factors will combine to present opportunities to organizations that can understand and manage risk profitably. Many product areas and customer segments are going to be under-served or completely ignored as this transformation evolves in the financial services industry. As with many aspects of our daily lives, organizations are simply going to have to return to optimizing the basics of their business to prosper during this transition.
We believe one of the key basic elements of managing risk profitably will be Strategic Cost Management (SCM). In practical terms, organizations have three broad levers to increase profitability: pricing power, product mix, and efficiency. Given the commodity nature of many financial services’ products and the economic backdrop, we believe opportunity to broadly leverage pricing power and product mix will be limited for quite some time. Much of the opportunity in the near future will be how to deliver products and services more effectively to the right customers. Understanding how to efficiently meet the needs of the customer and the highest and best use of scarce capital will be essential in this environment.
We feel that Strategic Cost Management is an important tool to improve tactical and strategic decision making for companies across all industries. Given some of the unique challenges of the financial services industry, we believe Strategic Cost Management is going to be critical for companies to survive and thrive.
Tags: Economic Cycle, Risk Profitability