In the current slow-growth economy, aggressive cost reductioninitiatives continue to be a key board-level imperative for creditunions. New regulations, competitive threats and re-architecturerequirements of aging IT systems continue to perpetuate a “leaneris better” mindset throughout the industry.

After undertaking numerous rounds of cost efficiencies over thepast five years, today many within the industry have reach­ed thelaws of diminishing returns with their current cost reductionprograms — or worse, are beginning to see adverse effects on growthand profitability as a result of short-term cost cuttingactions.

Given this reality, it is becoming clear to many executives thatfuture efficiency gains require a shift from tactical costreduction actions to more strategic cost management. Thismeans a greater focus on increasing the efficacy of cost reductionefforts while simultaneously investing in capabilities that willenable long-term growth and profitability. However, making thisshift can be difficult.

How Complexity Threatens Cost EfficiencyGoals

Cost management is undoubtedly one of the most complexactivities in corporate planning. Unfortunately, the complexity ofthe exercise is accelerating at an increasing rate due to the fastpaced nature of business—which is fueled by competition, 24/7communications and rapid tech­nology advances. For many reasons theobjective of cost efficiency is clear, but the execution isburdened with many obstacles that hijack the exercise and give riseto a much lower outcome than originally was ambi­tioned.

Human and political factors are causes not to be neglected. But,commonly the blame for cost reduction project shortcomings is owedto increasing dynamic complexity, which results from hidden,unknown factors—or more precisely, interactions betweenfactors—that can be­come significant and unexpectedly predomi­nantin the cost equation. Over time, cost management programs becomedestabilized as the impacts of dynamic complexity causeunanticipated losses in quality, changes to volumes, and/orincreased costs.

Making the necessary shift from tactical cost reduction actionsto more strategic cost man­agement is a challenge because theinterde­pendencies between in-house and outsourced businessprocesses, services and infrastructure have become overly complexand exist in a constant state of change.

Under these conditions it becomes increasingly difficult toaccurately assess the potential impact of critically importantdecisions. Without forward-looking visibility, executives are oftensurprised when the results of their cost reduction decisionsproduce unacceptable levels of risk or unintended consequences.

Gaining Visibility into Hidden Factors that Drive CostEfficiency

Most credit unions use some form of business analyt­ics to helpguide cost reduction decisions—whether in the form of spreadsheetsor perfor­mance management software. However, business systems havebecome too complex and dynamic to be understood using methods ofstatistical analysis. The result is a tunnel-vision view, whichprovides decision makers with only partial knowledge of anysituation.

Dynamic complexity results from new, never seen before patternsthat cannot be under­stood, measured and controlled using ahistorical review of what has happened in the past. The effects ofdynamic complexity indirectly appear in a balance sheet overtime—growing undetected until they become obvious, at which pointit is often too late for effective remedial actions.

Finding the Answer to “What is Optimal?”

Modern approaches to predictive analytics are able to revealcurrent system inefficiencies and provide a future-oriented viewinto how changes across services, architecture and infrastructurewill impact performance.

In much the same way CAD/CAM is used in engineering and design,this process allows institutions to test ideas, validate plans andbuild operational models to perfect cost management strategiesbefore any changes or invest­ments are made.

With visibility into the factors that influence cost base acrossthe entire business, it becomes easier for executives to identifyopportunities to improve efficiency.

4 Steps to Improve Cost Management Programs in 10 Weeksor Less

1. Model current system behavior – While thereare many opportunities to set and achieve strategic cost managementgoals, it is most advisable to start by identifying a single,high-priority business problem to solve—with the goal being toquickly demonstrate success and prove that gains can be realizedthrough the applied use of predictive analytics. Credit unions canuse pre-built models and templates to accelerate time to value andfill in data gaps.
2. Interpret current system behavior – Once themodel have been proved, users can start identifying root causes ofan increasing cost base and/or decreases in quality of ser­vice.Then prediction capabilities can be used to identify which systemsand infrastructure will cause potential bottlenecks andcon­straints as services adapt and scale to meet increasing demandsin the future.
3. Identify improvements to business and ITsystems – “What if” analysis can be performed to determinethe effect of aging on current systems while prescriptivecapabilities can be used to identify which remedial actions arerequired to improve the envi­ronment. Additionally, benchmarkingcan be used to expose new opportuni­ties for improvement. Cleargraphical displays help users prioritize which changes will yieldthe most significant improvements in terms of efficiency, cost andquality.
4. Model future system behavior – Once theoptimal future state has been identified, credit unions canvalidate if planned changes will yield the desired results beforechanges and investments are made. The overall effectiveness of anyservice process or project can be measured in terms of throughput,quality, cost and risk, while corporate dashboards can be used toassess performance against key business met­rics.

Today, costs are undoubtedly a major concern for credit unionsthat need to adapt to a tougher regulatory landscape and improvecompetitive position amid uncertain economic conditions.

A great opportunity exists for those credit unions that are ableto significantly raise the cost effi­ciency bar—by gainingvisibility into strategic cost management opportunities that havethe potential to boost the institution's long-term health—in a waythat ultimately helps the credit union 'do more for less'.

Stripping out cost is undoubtedly hard work, fraught with manychallenges, but predictive analytics can help ease theburden.

Modern approaches to predictive analytics allows credit unionsto gain a unified view of the dynamic factors that drive cost base,compare themselves through robust competitive benchmarks tohighlight alterna­tive ways of working, and create the right actionplan to improve the institution's flexibility, responsiveness andefficiency as needed to meet evolving member demands.

While those that lack transparency into the root causes of costinefficiencies may well still achieve growth, it may beunprofitable growth. Credit unions that approach cost as aboard-level strategic concern will—with the right decision supporttools—deliver superior member value, demonstrate the economicstrength regulators are requiring and secure a real competitiveadvantage.

Nabil Abu el Atais founder and CEO of AccretiveTechnologies in New York City.