Cost transformation in risk

As featured on BusinessMirror: Cost transformation in risk

The cost to maintain effective, regulatory-compliant programs is at an all-time high, with ever-evolving expectations that will only add to operational costs. In today’s uncertain economic environment, minimizing cost and improving an organization’s efficiency ratio are at the top of nearly every C-suite’s agenda.

The KPMG Global Risk and Compliance Benchmark reveals that while many banks intend to increase spending on personnel and operations in 2024, a significant number also aim to cut costs, indicating a need for efficiency in risk management expenditures.

Achieving significant cost reductions requires a strategic approach that goes beyond budget cuts. Organizations should identify factors driving expenses and develop targeted strategies to help streamline operations. Demonstrating incremental savings is crucial for maintaining momentum and carefully evaluating cost reduction levers, such as outsourcing and process simplification, is key. These initiatives should align with a detailed risk transformation strategy.

A modern approach to risk management lowers costs while maintaining or improving quality. For risk executives, there are ten primary cost-reduction levers to engage that can help individually reduce costs but collectively yield significant cost-saving opportunities:

Rationalization of legal entity, functional and organizational risk accountabilities to eliminate redundancies while aligning appropriate experience and skillsets in execution and oversight of risk-taking.

Rationalization of product offerings and channel delivery strategies to help reduce the variability in associated risk and oversight burdens, a decision that is typically led by the business.

Acquiring risk headcount from cost-advantageous locations.

Enhanced or streamlined operating models to execute risk requirements in a cost-advantageous manner, including the use of centers of excellence, utility functions or other consolidated delivery approaches; in many cases, these changes can be paired with low-cost or global sourcing strategies.

Use of third-party vendors to execute select risk management oversight or execution activities on behalf of the first and second lines of defense.

Common technology strategy to collect, maintain and facilitate risk-related data (i.e., single platform or linked systems, data repositories).

Digitized risk processes, documentation and control environment, including the use of automation and advanced analytics to gain efficiencies.

Creating a single, rationalized and clean source of truth of organization risk taxonomies, inventories and data in an optimized architecture strategy.

Alignment and rationalization of risk processes, assessments and methodologies to streamline the annual burden of risk execution and oversight while still maintaining quality.

Rationalization of other risk oversight and execution-related osts not related to headcount, such as training programs and license fees.

The sequencing of cost takeout efforts can be critically important to get maximum benefit in the shortest timeframe. To date, traditional efforts to alleviate costs in risk management have yielded marginal results. These conventional efforts typically lead with technology or rush to automation without addressing the root causes that drive duplication and inefficiencies.

These inefficiencies are then compounded as organizations establish centers of excellence to process high volumes of risk activities while still leveraging complex methodologies or including a push to offshore functions that still rely on heavy onshore oversight. Some of these efforts are being scrapped altogether, given the marginal yields and quality control issues to explore alternative delivery models, such as outsourcing to a third party, which often results in a loss of the upfront investment made.

Unplanned and potentially short-sighted cost-cutting efforts are ultimately frustrating given the volume of rework, time to market and multiyear investment required to yield marginal results or non-scalable solutions. Moreover, such efforts may fail to keep pace with changes in the marketplace, evolving strategy or modifications to regulatory expectations. The difference between strategic and thoughtful cost takeout transformation versus near-term cost-cutting can be dramatic.

Sequencing cost takeout efforts through the lens of shortterm and long-term savings can position an organization to methodically and purposefully build with the end result in mind. An organization should focus initial efforts on planning and ideation to clearly define intended outcomes and a long-term target operating model. These are essential to enhancing cost savings with limited investment. Subsequently, organizations should then focus on enhancing root causes or foundational issues that result in higher costs before fully implementing the long-term vision.

Cost takeout efforts should be thoughtful, strategic and coordinated. While the long-term cost takeout opportunity is significant, it’s equally important to demonstrate incremental savings and quick wins to internal and external stakeholders.

Some organizations are pursuing a dual track of cost takeout initiatives that include utilizing short-term tactical solutions such as headcount or expense rationalization to help reduce costs in quarterly increments while also executing strategic initiatives to unlock maximum and sustainable savings. This approach has been successful in demonstrating immediate savings to investors, contributing to the strategic cost takeout vision and garnering internal support for further cost takeout investments.