Financial Institutions focus their efforts on ensuring an organizational structure and a business model that allows them to respond in a timely and efficient manner to the needs of a highly dynamic and competitive market. In this context, business development must be accompanied by efficient management of the Institution's resources, so it is necessary to develop different Cost Management and Control Models, thus promoting a culture of cost optimization. under the orderly management of the same.
OBJECTIVES
The proposed Cost Management Models must contribute to the strategic objectives of the Business Group through the following general objectives:
- Control expenses and investments, through budget formulation and monitoring, allowing the detection of deviations, proposing savings and fostering a culture of optimization of spending. Carrying out an adequate allocation of costs to customers, products, channels and activities, in order to use this as Management measurement tool in a reasonable and timely manner. Manage operational efficiency through cost control of operating, distribution and sales channels, seeking efficiency in the use of resources.
DEFINITIONS AND TOOLS
To achieve these objectives, it is necessary to show the different perspectives from which expenses can be analyzed and direct efforts towards what adds value to shareholders. Being clear about what these are and what you are looking to measure in each one, you can find opportunities for improvement and solutions to problems involving different aspects of expenses and costs, which will help you manage them efficiently and effectively.
Expenses can be viewed under 2 perspectives: one accounting (direct costs) and the other by processes (direct costs + assigned or distributed), which in turn are subdivided into 3 views each, which are explained in detail. general:
Accounting Perspective
They are the expenses recorded in an accounting account and charged directly to a specific Cost Center (CC). Here are considered the direct expenses of each Unit (there is no allocation or distribution), which are in relation to the number of people and the expenses requested and approved by each person in charge of the CC (or Organizational Unit). For these there is a cross control, that is, on the one hand there is the head of the Organizational Unit (OU) and on the other hand there is the head or Manager of Accounting Line (AR). The latter is the area responsible for ensuring a group of accounting accounts, maintaining and centralizing the relationship with suppliers,therefore, the former are the service applicants (quantity) and the latter are those who provide the requested service through suppliers or internal staff (price). From these two managers three views are born:
Vision by Item Manager
This is the horizontal view of accounting expenses, through which an area called the Item Manager or Specialized Unit is responsible for ensuring the expenses that are recorded in the accounts under its supervision, maintaining the relationship with suppliers, searching for better prices and the best service and quality, find economies of scale and, in general, ensure that expenses are carried out efficiently.
Vision by Organizational Unit
This is the vertical view of accounting expenses, through which an area called Organizational Unit is responsible for reviewing and approving the orders for services and purchases that it requires for the development of the functions it performs in the organization, all under one criterion of culture of savings in spending, seeking that these are generated effectively. Normally, all the Administrators of Item are Organizational Units.
Vision by Spending Inductors
This is the third view of accounting expenses, through which it allows to follow up on all those expenses generated, such as real estate, equipment, marketing campaigns or specific projects approved and undertaken by a person responsible for them, measuring both effectiveness as well as efficiency in its management.
For the follow-up and monitoring of the accounting view, the Budgetary Control of Expenditure Model has been developed, which uses the budget as a tool, assuring the High
Management compliance with the proposed goals and those responsible for them, as well as making timely and appropriate decisions and actions, pre and post to the generation of spending. In summary, the Model allows:
- Optimize and reduce costs. Control and monitoring matrix (UO - AR) and three-dimensional (UO - AR - Inductor). Economies of scale. Responsible with budget commitments. Promote a culture of savings and transparency.
GRAPHICAL SCHEME OF THE EXPENDITURE CONTROL BUDGET MODEL
(See PDF)
Process Perspective
From this perspective, what is sought is to measure the costs of Clients (Business Units and Officials), Products (Family of Products), Distribution and Sales Channels (Agencies, Sales Force, Virtual Media, Operating Areas) and the Activities (by Product or Client) that involve these processes. The big difference with the Accounting Perspective is that in order to finance the processes, it is necessary to use the results of direct expenses and on them apply different parameters in order to take us to what we want to finance and analyze.
The tools on which the Process Perspective is based is through the Cost Allocation Model (MAC), the Channel Efficiency Model and the ABC Costing Model, all of them are closely related so that although there are three Models of Different costing, however, uses practically the same sources of information. The difference is in the level of analysis and the frequency and timing of follow-up.
It is precisely the level of analysis that gives us the guidelines to divide the Process Perspective into three views:
Processes perspective from the Profitability view
This is the vision that seeks to have an objective approximation of the costs of products and customers, through optimizing the distribution of expenses in macro activities or levels, such as: customer sales, product sales, processing, recoveries and collections, support, administration, business supervision and senior management. Thus, on the basis of the accounting records and using different distribution parameters, the costs of both products and customers are determined and thus, together with the income generated, a profitability is measured for each business line or product.
For this, the Cost Allocation Model is applied, a methodology that is the gateway to the Channel Efficiency Model since it helps in generating costs in that dimension. In summary, this model allows:
- Costing under a Matrix (Customer - Product) and Three-Dimensional (Customer - Product - Channel) Business Model. Timely monitoring of different business structures. Managing by objectives and performance compensation. Focusing on profitability and efficiency. Separating costs from Good Bank and Bad Bank.Acceptance and consensus of the results - reliability of the model.
Perspective Processes under the Canal view
Modern banking currently requires greater attention to its distribution and sales channels such as: traditional media (agencies, sales forces and operating areas) and virtual media (ATMs, Internet, etc.) since through these It will be possible to optimize the service to the clients, offering them greater accessibility and comfort in the attention, which will result in the loyalty of the clients and their profitability.
The Canal view is the one through which the idle capacity or operating efficiency of the Distribution Channels (agencies, correspondent ATMs, ATM, internet, telephone banking, payment and consultation terminals and operating areas) and the Sales Channels are measured. (Sales Force: Internal and External) using statistics of generated transactionality and obtained productivity, respectively. For this, it is necessary to calculate the Standard Transactional Unit Cost (Cute) that allows to objectively measure the efficiency in the Channels of
Distribution, while on the Sales Channels side it is necessary to calculate the Internal Commission for Product Sold (CIPV) which is what allows to measure the production and productivity in them. These results, in turn, allow internal and external benchmarking that lead us to apply best practices in each case and the franchise concept within each channel.
For this, the Channel Efficiency Model is applied, a methodology that uses the information from the Cost Allocation Model as a source and whose main objective is to measure the efficient and effective use of resources in the operational and sales areas of the institution., making comparisons of the use of resources, levels of installed capacity, balance points, among others, which together with the Business Profitability Model help us to make the ideal decisions for the generation of value. In summary, this model allows:
- Measure installed capacity in channels Identify idle capacities or operational efficiencies Focus on efficiency, complementing profitability results Determine Unit Transactional Costs Migrate transactions to less expensive channels Find best practices and replicate them (franchise concept).
Processes perspective under the Activities view
From this perspective, what is sought is to approximate the cost of each of the activities that together make a process that has tangible results, both on the product side and on the customer side. This vision attacks specific business of the organization and crosses it throughout its structure, in order to detect activities that do not generate value for the organization and seek best practices that allow the efficient use of resources. Additionally, this approach helps to obtain and develop a rate structure towards clients that generates the expected profitability.
For a correct management of the Activities view, the ABC Costing Model must be applied, which performs a survey of the business tasks and activities to be analyzed, which together with their direct and indirect costs, generate as a result the value of the activities found, using the parameters of the Cost Allocation Model and others if necessary.
It is important to comment that the opportunity of the information provided by this methodology is a function of the processes that the company has for the development of its activities, that is, to the extent that these processes are mostly automated and mechanized, the information will have a periodic, timely and less subjective character; while if these processes are traditionally manual, as it is in banking services companies, the result is usually a snapshot of the moment, so the information is not necessarily periodic, the information opportunity is not necessarily continuous and the results have a higher dose of subjectivity; which does not mean that the results are not important, what happens is that as corrective actions are applied, or activities are changed,or there are organizational restructurings, or changes of people with different salary levels or dedication percentages, the initial results will have to be measured again. That is why it is understandable that to the extent that the processes are mechanized, their periodicity, timeliness and objectivity should not vary, with which the fluctuations are less.
Finally, it should be understood that the ABC costing results will not necessarily lead to a reduction in costs, as a person may stop doing one process but will continue to do others. However, if we combine the information from the accounting view and the ABC costing, the results should be much more decisive. In summary, this model allows:
- Measure the activities that lead to the generation of the product or the sale to the client. Optimize the prices (tariff) towards the client. Complement the results of the accounting view. Determine a dictionary of company activities.
GRAPHICAL SCHEME OF THE COST ALLOCATION MODEL
BENEFITS
As can be seen, Strategic Cost Management is essential in any Financial Institution that seeks to remain in an increasingly competitive and demanding market, as it helps to find opportunities for improvement through:
- Optimize the management of expenses by being able to reduce them, improving the efficiency of the company. Establish a budget preparation methodology that seeks to define managers and commitments. Synchronize and manage the concept of group (company and subsidiaries) and economies of scale, thus avoiding a double effort and cost. Ensure the correct allocation of costs to the Units according to what is defined in the Business Model, achieving acceptance, consensus and reliability of the information. Generate a dynamic such that, on the one hand, the business units and Together they look for alternatives to optimize costs and, on the other hand, the product units look for new alternatives to generate additional income. Identify levels of idle capacity and operating efficiency by channel, generating cost savings.Define standard transactional unit costs. Standardize processes in traditional channels, based on the franchise concept. Evaluate distribution and sales channels under the concept of quality and efficiency, parallel to profitability. Promote better operational structures, reorienting those responsible for channel towards the administration and authorization of new processes.
CONCLUSIONS
Strategic Cost Management provides a comprehensive view of the issue of costs and expenses, it is not limited to recommending a single vision or perspective, so those who recommend a certain methodology as a solution to all problems do not necessarily conform to the truth It will depend a lot on the type of solution that the company requires. It is possible that its initial urgency is to reduce costs, so working with the Budgetary Control of Expenditure Model is the most recommended, and by working this Model indirectly, the bases are being given for the application and use of the other Models, since they are the costs direct the source on which they work.
If the urgency is to have a result by client and product, it is recommended to work with the Cost Allocation Model, this will take you hand in hand to the Channel Efficiency Model, the two Models are closely related.
While if the urgencies are on the side of which activities are those that generate the greatest load to the client or the product, or you want to determine how much should be charged to a client for a certain product or service, it is recommended to use the Costing Model ABC.
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