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Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions by Thomas C. Wilson

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Chapter 12Achieving Operating Efficiency

Bankers and asset managers use cost/income ratios, insurers use expense ratios. Although each industry uses a different metric, each is used to help understand, compare and manage the cost of producing the next euro of revenue or income. As such, they all represent a measure of operating efficiency, one of the five KPIs which have a direct and material impact on the franchise value of the firm, as illustrated in Figure 12.1.

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Figure 12.1 Operating efficiency as key driver of franchise value

A balanced discussion of operating efficiency is timely: in lieu of any real growth prospects in developed economies, operating efficiency and expense management was the lever of choice for many banks and insurers during the 2008–2013 turbulence and subsequent weak economic recovery.

Some banks and insurers reacted to the crisis with broad-based cost savings programs – for example, across-the-board expense and FTE reductions, delaying critical IT investment, squeezing suppliers in an effort to “share the pain” – all of which were designed to deliver short-term benefits (Accenture, 2008; BCG, 2013; McKinsey, 2013b). According to PricewaterhouseCoopers (2009), “Combating the worst financial crisis in living memory was never going to be easy, and immediate survival and associated cost reduction have therefore been the primary priorities for most financial ...

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