2017 Cost Excellence Roundtable - Ernst & Young · driven segmentation model to isolate and predict project execution risks, releasing more than $80m in investment capital from unnecessary

2017 Cost Excellence RoundtableEY Innovation Center Union Square, New York

28 June | Key takeaways

1 | 2017 Cost Excellence Roundtable

Dear participants of the 2017 Cost Excellence Roundtable,

We would like to take a moment to thank you for attending the event and for contributing your knowledge, enthusiasm and curiosity to the roundtable discussions. We were delighted to have the opportunity to share with you our latest views on cost management leading practices, and we valued the perspectives, insights and challenges you all brought to the conversations.

We have received positive feedback from many of the participants based on the relevance of the presentations, the value of the conversations and the opportunity to network with peer institutions and EY’s Financial Management team. We were also pleased to see our costing community growing from last year’s event, with the addition of representatives from other financial institutions. The success of the event would not have been possible without your participation and commitment.

This brochure contains a summary of the event, including the materials presented and key takeaway messages. Please feel free to share this document within your organizations and reach out to us if you would like to discuss any of the content from the roundtable event, as we would be happy to continue the conversation with you.

Thank you for being part of our costing community. We are looking forward to speaking with you soon.

Thank you,

Steve Krueger and Matt Polvara

Thank you


Table of contents

Presentations

Cost insights: are they hidden in plain sight?

Cost allocations in the age of living wills: what’s next?

Co-opetition: is this the ultimate frontier for operational efficiency?

EY’s Cost Allocation practice

EY contacts and Cost Allocation website

PresentationsPresentations

1Cost insights: are they hidden in plain sight?

Speakers: Sameer Gupta (EY) and Joe Kruse (EY)


Spend analytics

Advanced analytics and artificial intelligence (AI) are being employed by financial institutions as a way to derive better insights into their operational performance, including spending behaviors. Advanced analytics methods enable the review of large amounts of data, both structured and unstructured, to detect hidden trends and patterns, isolate anomalies and strengthen data-driven decision-making. Because spend-related data comes from many different parts of the organization and signals can be embedded in various formats (e.g., payment notes, invoice details, service level agreements (SLAs), vendor behavior, utilization characteristics), the application of advanced analytics provides a powerful way to identify these signals.

EY has assisted our clients in numerous ways to improve spend effectiveness through the application of advanced analytics.

Some examples of successes include the following:

• �For�a�global�financial�services�company.�Assisted in evaluation of a large seven-year outsourcing contract for IT services, leveraging analytics to uncover utilization and efficiency-related economics, resulting in $500m in negotiated pricing reductions over vendor bids

• For a US regional bank. Facilitated a review of a large portfolio of IT project spend, deriving an analytics-driven segmentation model to isolate and predict project execution risks, releasing more than $80m in investment capital from unnecessary or delayed projects

Analytics are used as a way to drive insights and add control across the spend life cycle, from understanding the actual transactions to detect unusual behavior, to driving the spend strategy with detailed usage analyses across the organization. The goal is to help spend managers become more effective by increasing transparency and uncovering opportunities.

Challenges are evident. Key among them are:

• Data availability. While data has always been a challenge, advances in analytics have reduced organizations’ dependency on 100% accurate and connected data to derive insight.

• Resources. Some of these methods require new skill sets to design and maintain the analytics assets. Hiring and training of new talent, as well as collaboration with internal and external sources of analytics expertise is often required.

• Technology. Executing advanced analytics requires new tools and next-generation data environments, often not readily accessible in middle and back-office operations.

To overcome these challenges, it is important to address the following:

• Data sourcing and aggregation. Improving the understanding of the sources and location of the data needed, and the methods to join disparate sources is important in order to overcome data and source fragmentation. Novel techniques including usage of fuzzy matching and knowledge graphs have helped lower barriers to extract insight from physically separated data sources.

• Analytics. Leveraging of a variety of advanced clustering, pattern recognition and anomaly detection techniques to uncover adverse trends, behaviors and opportunities. Furthermore, Natural Language Process (NLP) and cognitive techniques are increasingly being employed to derive insight from text-data related to spend in contracts, service level agreements, invoices and payment data.

• Reporting. Selecting the right metrics, effective aggregation, trend and drill-downs, and then embedding these analytics and insight layers into traditional reporting and creating customer alerts, can make management monitoring of spend significantly more effective.

With leadership commitment, and the right up-front design and investment in key resources, all of these challenges can be overcome. At EY, we are focused on bringing more meaningful insights to improve the way our clients manage their operations. This often means looking at data in non-traditional ways, leveraging advanced analytics and creating sustainable monitoring and business intellegence assets that enhance insights over time.



Leveraging analytics to improve business performanceIllustrative examples

Telecom company Global financial services major Bank in the Southeast Global financial

services company

Ana

lyti

cs

• Analyzed over $1.5b in indirect spend across 20+ categories

• Evaluated for opportunities around spend fragmentation, price variance, vendor SLAs, utilization, etc.

• Negotiated supplier agreements

• Evaluated a large, 7 yr. outsourcing contract for all IT services, looking for price reductions

• Evaluated contractual service levels against actual demand and utilization

• Creating ongoing tracking and optimization

• Evaluated a large portfolio of internal IT investments for rationalization opportunity

• Created analytically derived segmentation and prediction of project execution risks, based on various attributes

• Analyzed 35+ payment streams through disparate sources

• Leveraged advanced segmentation, language analysis and other techniques to connect data together

• Enabled new tools to monitor and identify opportunities

Impa

ct

• Over $100m annual reduction in indirect spend

• $500m+ reduction over baseline spend

• Released over $80m in investment capital from unnecessary, delayed or over-specialized projects

• Over $200m in recoverables and over $3.8m in yearly savings through float management

Analytics-driven approach can aid insights and controls across the spend life cycle

• Robust “fuzzy” vendor name matching

• Automated view of price dispersion trends using various dimensions

• Robust goods and services taxonomy

• Usage of NLP on contracts to analyze features

• Automate reconciliations• Integrate with enterprise

data

• Demand forecasting and management

• Attribution of vendor spending in business-relevant terms

• Detailed usage analysis of goods, support and services

Payment administrationSpend insights Spend strategy

• More transparency into spend environment• Reduction of errors and waste• Increased compliance with policies and terms



Insights are extracted from pairwise and three-way comparisons of key sourcesIllustrative examples

AP/GL data

Contracts and SLAs

Usage data

Invoice data Asset/ Resource data

SLA rationalizationUnused services

Spend fragmentationOverpayments, duplicates

Asset utilization

Asset spec review

Price and SLA benchmarkingEfficiency improvements

A holistic set of spend reduction levers can thus be supported by rigorous analysis

Category Lever Sample analytics for identification Sample actions to capture

1. Unit price reduction

Vendor renegotiation

• Pricing review and benchmarking• Utilization and SLA assessment• Review for contractual credits

• Price renegotiation (RFPs, e-auctions, etc.)

Mix shift • Review high vs. low cost resource location • Offshoring• Drive to web

Restructuring • Identify capital intensity levers of owned assets• Identify options for virtualization, cloud computing

• Sale and lease-back• Move to cloud

2. Demand rationalization

Spend consolidation • SKU level spend review of AP/GL data • Tighter rules for PO authorization and reimbursement

SLA rationalization• Review of onshore/offshore service SLAs• Timing and coverage• Response times

• Rationalize SLAs to align with needs/demand

Spec rationalization • Identify over-spec’ed goods and services in relation to usage/need

• Realign specs with true need and usage

Waste reduction• Identify low utilization and unused

resources/assets• Identify per-unit resource

• Cancel/return/resell unused assets and services

• Re-establish baseline for pricing

Spend prioritization

• Review ongoing spend on capital projects (e.g., IT, real estate)

• Review for business case, “bells and whistles,” etc.• Driver analytics for proactively identifying at-risk

projects

• Cancel, defer, rescope• Establish monitoring for time and

cost overruns

3. Streamline usage and delivery model

Assets (build vs. buy)

• Review build vs. buy options on software/app/hardware/real estate and other capital investments

• Review investments on assets slated for sunset

• Rationalize investment in upgrades• Rationalize customer build• Defer investments based on life

stage

People (engage vs. hire)

• Review employee/contractor mix • Reset delivery model for maintenance and build/change tasks



Innovations like driver analytics help proactively identify cost and time overruns

• Overreliance on summarized reported trailing metrics to monitor IT project portfolio

• A reactive portfolio management and significant value loss

• Leverage multiple data sources to identify right pattern of factors associated with “good” and “bad” projects

Objective Approach Results and benefits• Increase in project cost

savings• Better root cause analysis

• Identify projects that are at risk of going over budget

• Improved data sourcing• Advanced analytics

techniques• Unstructured data

analytics

• Increased value captured• Improved cost efficiency

Comprehensively applied across the baseline of spend categories

LeversPrice reduction Demand rationalization Delivery model

Spend category Spend sub-category Sample firm

spend

Reneg-otiation

Mixed shift

Restruc-turing

Fragmen-tation

reduction

SLA rationalization

Scope rationalization

Reduce waste

Spend priori-

tization

Assets (build

vs. buy)

People (hire vs. engage)

A – Purchases

Professional services (incl. It) 13% P P P P P P P PInformation processing

Other expenses 5% P P P P P P P

B - Ongoing BAU

Brokerage, clearing and exchange fees 19% P P P P

Legal 18% P POccupancy 15% P P P P P PMarketing and business development

7% P P P P P

Professional services 2% P P P P P P P

C - IT Expenses (CTB)

Professional services 3% P P P P P P P P

1% P P P P P P P P

D - IT Expenses (RTB)

Information processing 15% P P P P P P P P PProfessional services 3% P P P P P P P P



Unstructured text analytics applied to transaction data can reveal new insights

High and growing average balance

Regular utilities payments

Presence of external investment

Recurring direct deposit

Text mining of transaction descriptions

Results are fed into detection models, trend analysis, etc. to provide more nuanced and accurate results.

Date Description Amount Balance

23-Feb-16 WILSON ELECTRIC US DIRECT DEP PPD ID: 9222222203 ACH credit $1,149.84 2045.1322-Feb-16 PUBLIC SERVICE PSEG PPD ID: 4222222800 ACH debit ($41.47) $2,086.60 22-Feb-16 FID INVESTMENT 809229829085034 WEB ID: VMC PUR ACH debit ($500.00) $2,586.60

9-Feb-16 INTEREST PAYMENT Misc. credit $0.06 $2,586.54 9-Feb-16 BJS EMPS BATCH PPD ID: 2343566511 ACH credit $30.39 $2,556.15 9-Feb-16 WILSON ELECTRIC US DIRECT DEP PPD ID: 9222222203 ACH credit $1,055.80 $1,500.35 5-Feb-16 AMERICAN EXPRESS ACH PMT W8582 WEB ID: 2005032222 ACH debit ($30.39) $1,530.74

5-Feb-16 Online Transfer from NND ...2972 transaction#: 5157297322 Account transfer $1,500.00 $30.74 1-Feb-16 CITI CARD ONLINE PAYMENT 222223702432278 WEB ID: CITICTP ACH debit ($231.70) $262.44 1-Feb-16 FID INVESTMENT 809228829085334 WEB ID: VMC PUR ACH debit ($1,250.00) $1,512.44

30-Jan-16 CHECK # 2034 | See details of this check.2034 Check ($78.75) $1,591.19 24-Jan-16 WILSON ELECTRIC US DIRECT DEP PPD ID: 9222222203 ACH credit $1,259.73 $331.46 23-Jan-16 PUBLIC SERVICE PSEG PPD ID: 4222222800 ACH debit ($38.04) $369.50

17-Jan-16 CITI AUTOPAY PAYMENT PPD ID: CITICARDAP ACH debit ($27.60) $397.10

• Nature of payment• Critical vendor information

• Income, savings and investments• Credit distress

Application of language analytics to pull signals out of unstructured payment data:


2Cost allocations in the age of living wills: what’s next?

Speaker: Matt Polvara (EY)



Financial institutions are investing significant funds to comply with the standards set by the Dodd-Frank Act regarding living wills. However, aside from meeting the required regulatory standards, most institutions were not able to leverage this investment to generate tangible improvements to the current costing capabilities.

Now that the initial requirements have been materially met, we are advising our clients to focus on the following three opportunities:

1. Improve operational efficiency of the costing processes

2. Expand the ecosystem built for living wills to cover the entire cost base and improve business adoption

3. Generate higher return on living wills investment by building actionable cost analytics that leverage the ecosystem to provide a set of complementary lenses on costs

Improve�operational�efficiency�

• Centralize and simplify the existing costing processes to reduce duplicative activities, avoid costly reconciliations and improve enterprise-wide consistency

• Adopt NextGen technologies, such as robotics and machine learning, to focus human capital on value-added activities (e.g., less time spent on reconciling data and more time spent on analyzing data and generating insights)

• Assess the opportunity to leverage lower cost operating models to reduce run rates and unused capacity; review location strategy for “in-house” processes to take advantage of domestic or international low cost locations, as well as to leverage the opportunity to outsource non mission critical activities to a third party

• Optimize investment spend by gathering a holistic view of requirements across all costing processes and streamline investments to make improvements once, as far upstream as possible in order create standardization and to benefit as many downstream processes as possible

Expand capabilities

• In order to comply with living wills, financial institutions have created a service view of their organizations and an interconnected ecosystem where complementary lenses such as contracts, consumption volumes, service level agreements and key performance indicators are mapped to the service catalog.

• For the current group of Recovery and Resolution Planning (RRP) plan submitters, our analysis shows that the ecosystem typically covers between 25% to 45% of the entire cost base1, with at least one G-Sifi

covering up to 70%. While the ecosystem serves a critical stand-alone purpose, in most, if not in all cases these financial institutions have not embraced this process and methodology as part of its broader reporting cadence and performance management routine.

• Financial institutions should review the service catalog as an asset and leverage it to better harmonize their services to the way the organization manages its business. Additionally, management should facilitate a full scale adoption of a service catalog as the standard reference view of unit/price to support financial planning, cost allocation, cost analytics and performance reporting.

• In order to facilitate this adoption organizations, should invest to increase the coverage of the service catalog and support methodologies to include the entire cost base while addressing other capability gaps, such as data quality management, service consumption measurement and the integration into the financial planning and forecast processes.

Increase return on investment

• Financial institutions have the opportunity to build actionable cost analytics leveraging the complementary lenses on costs that are made available by the living will ecosystem. In particular, we advise our clients to:

• Generate a cyclical (annual) normalized service cost comparison with peer institutions aimed at identifying opportunities for lowering the cost to serve

• Embed into business-as-usual more sophisticated cost reporting that leverages complementary actionable levers, such as contract provision optimization, improved demand management and, ultimately, increase transparency on service costing

• While we recognize that financial institutions will face change management challenges to fully adopt a service-based view (e.g., assigning accountability to the service owner), we believe this path, even when only partially implemented, can lead to significant improvements in the way organizations manage their infrastructure costs, which, according to EY research, still lacks transparency and actionable insights.

• To generate near-term results, we advise our clients to start small by focusing on a handful of services and building a proof-of-value benchmark and/or report that improves transparency or identifies cost cutting opportunities. The momentum generated by this effort and the ability to reinvest the savings back into the program would allow for organizations to replicate the proof-of-value process for other services through a set of short delivery cycles (e.g., five to ten services each).


1Sources: EY Global Cost Allocation Survey — Cost excellence: Viewing costs from a new perspective and EY’s experience supporting global financial institutions


Multiple costing initiatives provide opportunities to increase efficiencies and bank-wide consistency

rocess centralizationP

Transfer pricing

Living will

Enterprise cost

management

Service costing

Cost initiatives

Legal entity allocations

Management allocations

Cost development

Determine markup

Perform costdistribution

Cost reporting

Key:Colored lines indicate cost processes

Enterprise cost management line Management allocations lineLegal entity allocations lineTransfer Pricing lineLiving Will lineService costingCosting activities

Cost takeout

Cost benchmarking

• One of the main barriers in adopting a bank-wide costing governance model is the fact that banks typically run parallel and/or duplicative costing processes across the bank.

• This is caused by a misplaced focus on silo solutions that deliver tactical and rapid responses to senior management, regulators or tax authorities.

• The below diagram depicts the redundancy created by having separate stand-alone costing initiatives.

1

Banks have invested millions of dollars to comply with living wills requirements. Now thatthe initial requirements have been met, banks should focus on 3 opportunities:

Improve operational efficiency Expand capabilities

Achieve return on Living Wills investment

• Process centralization• NextGen technologies• Outsourcing & location

strategy• Investment spend

optimization

• Service catalog• Non-critical services• Business adoption

• Legal Entity allocations• Consumption tracking• Provider-buyer-

beneficiary relationship mapping

• Build on Living Wills service pricing investment

• Actionable cost insights

Opportunities 3



Actionable cost insights should lay the foundation on the holistic ecosystem created forliving wills and should provide different views of the same data to service providers andconsumers to match their different mandates across the costing agenda.

ctionable cost insights

Infrastructure – supporting function

(service provider)

Front office(service consumer)

Accountability: minimize the bank’s cost-to-serve

Accountability: optimize service consumption behavior to reduce cost

Leverage living wills investment

•Key mandate• Minimize unused capacity

• Balance best in class vs. best in cost

• Optimize external providers

• Review third party contracts to add cost optimizations T&Cs

• Balance in-house vs. outsourcing

• Optimize location strategy for in-house activities

• Optimize tax profile

• Partner with service recipients to identify actionable cost reduction levers

Key mandate• Optimize controllable and/or

influeanceble cost

• Provide clear business requirements to the functions

• Provide accurate volume forecasts to the functions

• Optimize demand management and service consumption behavior

• Partner with service providers to identify actionable cost reduction levers

A

+ Extension of living wills investment to cover the

entire cost base

Create a costing center of excellence to orchestrate efficiencies and bank-wideconsistency

rocess centralizationP• Leverage investments that have already been made for RRP compliance to adopt a centrally coordinated model to

run the bank’s relevant costing processes in a consistent and efficient manner while leveraging common sets of data

• Central coordination could be coupled with central execution, leading to the creation of a costing center of excellence and resulting in streamlined costing processes and consistency across the organization

Allocations to Legal Entities

Cost Reporting Cost Benchmarking

Center of excellence

Cost development

Allocations to legal entities

Cost reporting Cost benchmarkingManagement

allocations

Cost takeout

Calculate markup

Transfer pricing

Living Will

Enterprise cost management

Service costing

Cost Initiatives

Key:Colored lines indicate cost processes

costing center of excellence lineEnterprise cost management lineTransfer pricing lineLiving will line costing activities

Management allocations

Legal entity allocations


14 | 2017 Cost Excellence Roundtable Cost allocations in the age of living wills: what’s next?

Start small to achieve immediate benefits, replicate and scale quickly through fast deliverycycles. Opportunities exist to improve capabilities currently in place with limited investment.

ump-start your transformationJAlignment of the entire organization behind

a common understanding of the current issues and the way forward

► Replicate pilot to entire cost based also encompassing lessons learned from every delivery cycle

► Streamline and integrate costing process integration

► Gather requirements, design, system enhancements

► Perform remediate data sources remediation and continuous quality improvement

Immediately improve processes through better dialogue and understanding of

consumption, and pilot to design insightful reports with readily available data

Costing transformation with consistent benefits generated through fast delivery cycles

► Develop bank-wide design principles ► Crystalize areas for improvement ► Design future state vision► Perform rapid assessment of current

state capabilities to identify gaps toward future state vision

► Develop road map adopting relay approach

Obj

ectiv

eK

ey a

ctiv

ities

Proof of conceptTarget state vision Implementation

Eyes on the target

Phase 2

Sprint immediately Replicate and scale fast

Phase 1

Foundational:► Cost allocation framework and governance ► Review/refresh service catalog to level 3 for

infrastructure costsPilot: (3 services):

► Services and service definitions developed up to level 6

► Service methodology and allocation driver ► Design of cost transparency report for the

services in scope (recipient and provider view)► Identify data gaps

Illustrative example

ctionable cost insightsACost component Efficiency levers driven by underlying benchmark results

Salaries ► Avg. permanent worker salary is $43,167 vs. $34,515 for peers.► Internal transfer and re-skilling to meet growth may have resulted in higher unit costs.► Non-mgmt. to mgmt. ratio is 5.35 vs. that of peers is 5.97 moving the average higher.► Higher ratio of support function staff, who have technical skills and who are paid higher.► Presence in expensive labor markets, such as California.

Other personnel expenses

► Higher regular pay leads to higher proportional benefit costs, incentive, and overtime pay.► Peers paid bonus ($30.5/loan). The $48.66 shown is the net of the difference.

Temporary workers ► Avg. temporary worker salary is $83,961 vs. $32,859 for peers.► Temporary workers accounted for higher proportion of the workforce compared to that of

their peers. May have outsourced functions to attain quality or address volume growth at a higher cost than internal or comparable peers.

Third parties ► Relatively higher use of third parties to deal with volume increase and inefficiency issues.► Exclusion of outsourced resources in the cost by peer companies.

Others (equip./ Telecom, occupancy, professionalservices, mail & courier, non-direct expenses, printing & copying, travel/entertainment)

► Telecom expenses appear comparable to peers.► Sites in higher cost locations compared to peers.► Regulatory scrutiny required professional services to support.► Potential use of higher cost ½-day or higher unit price or excessive mailing instead of

cheapest possible method.► Accounting differences on how losses are booked.

Additional efficiencyopportunity

► 46 accounts per employee vs. the peer average of 65.► Lack of System of Record creates manual work requiring more staff to do the same

amount of work.► Lack of workflow system creates positions that require manual management of workflow,

and resources to build QA, controls, reporting and analytics.► Too many specialized resources leading to poor spans of control - $28.72 per loan impact.► Higher portion of FHA loans relative to peers by 2.5% of portfolio: $16.60/loan impact.

$150k

$49k

$216k

$258k

$12k

$278k

$1,390

$1,668$1,679

$1,896

$1,944

Service cost: $2,094k

EYbenchmark:

$1,132k

Varia

nce

anal

ysis

3Co-opetition: is this the ultimate frontier�for�operational�efficiency?

Speaker: Suzette Massie (EY)

16 | 2017 Cost Excellence Roundtable16 | 2017 Cost Excellence Roundtable

Co-opetition: is this the ultimate frontier for operational efficiency?

Co-opetition:�is�this�the�ultimate�frontier�for�operational�efficiency?

Current market trends, such as increased focus on costs, heightened customer expectations and low interest rates, are incentivizing financial institutions to reshape and innovate their business processes in order to keep up. One way that financial institutions are tackling these challenges is by leveraging lower cost operating models that utilize third parties.

Many organizations are shifting their thinking away from traditional in-house operating models to outsource process activities, incurring high costs and not perceived as value-added to the services they deliver to their clients.

We see three lower-cost operating models predominantly utilized by our clients to drive additional value.

1. Managed services. This is a third-party model that promotes a flexible, customizable service to each institution to make sure organizations retain the appropriate level of control. More and more we see our clients are moving away from traditional outsourcing of commodity-type functions to consider higher-value activities that although not core to their mission, have previously been unavailable for a third-party solution due to complexity and lack of technology or adequately skilled partners.

2. Consortium. Two or more independent organizations that join together, through an independent third party, for the purpose of combining their individual requirements to leverage a more value-added, cost-efficient operating model. This model assumes each institution will agree on common processes and agree on the value of each service across the institutions.

3. Utilities/traditional outsourcing. These are common processes managed by a one-size-fits-all provider, which results in less flexibility and less ability to affect change that is specific to one organization.

We see that many of our clients consider utilizing a managed service model over a traditional outsourcing model for non-value-added activities for the following reasons:

• Tailored service. Each service is customizable and flexible to meet the needs of each individual client, which can allow a financial institution to maintain as much control over the process as deemed fit.

• Industry and sector leading advisors. Processes will be managed by industry-leading advisors with deep industry and sector knowledge to help make these processes as efficient as possible.

• Increased effectiveness and cost savings. Utilizing a managed services model with EY will reduce time and costs spent on non-value-added activities and allow your personnel to focus more on areas that provide a differentiation factor for your institution.

Some of the most recent work we have done in the managed service space includes the following areas:

• Global regulatory reporting

• Financial crimes compliance

• Global tax reporting services

• Internal audit co-sourcing

• Testing

• Third-party risk management

• EY Insurance Nexus


Changing marketplace Market forces are driving a significant shift in our financial services advisory business.

Recent trends

Changing threats, vulnerabilities and risks

Cost cutting to offset eroding profitability

Moving from a historically low interest rate environment and more reliance on fees

Global uncertainties, such as Brexit and overlapping regulations

Preference for managed services over traditional service providers for some functions

How our clients are reacting• Reshape: Rethink buying behavior and sourcing

strategies for utility or non-core capabilities

• Control: Rely on managed services to benefit from a high-level of expertise and capability — typically only available to the largest firms

• Protect: Address threats to business continuity, including cyber and financial crime

• Optimize: Outsource specific functions (as opposed to BPO or traditional projects) and benefit from a managed services provider’s deep knowledge, which would otherwise need to be staffed

• Grow: Regain profitable relationship growth in an era of heightened customer expectations and nontraditional market entrants

• Innovate: Use technology-enabled optimization of processes built into managed services, such as machine learning, artificial intelligence and data robotics

Heightened customer expectations and disruptive market entrants

Source: EY’s Global Banking Outlook 2017

Leveraging lower-cost operating modelsEvolving market strategies

Managed services Consortiums Utilities/traditionaloutsourcing

Cons

ider

atio

ns

• Regulatory acceptability

• Comfort with evolving automationtechnology (e.g., RPA)

• Cross-border data privacy

• Distributed delivery models

• Higher level of control and oversight for service and delivery structure

• Oversight review embedded in the business

• Alignment to operating model across multiple participants

• Complicated legal entities/member structure and IP considerations

• Complex governance

• Moderate level of control and oversight for service and delivery structure

• Oversight review part of governance and requires additional third party review

• Credibility within industry

• Comfort with operational infrastructure

• Significant oversight

• Less control of services and delivery model for single entity member

• Requires more significant third-party oversight review

Char

acte

rist

ics

• Client-specific process design

• Client-defined application utilization

• Client-ownership of data

• Utilization of the right tech enablers for the situation

• Utilization of subject matter resources to design implement the solution

• Various options for distributed delivery (onshore/offshore/combination)

• Can take advantage of consortiums and utilities to enable delivery as those models evolve to provide a holistic solution

• Common process

• Shared operations

• Leverage common tools

• Broader data sharing

• Primary benefit to founding organizations

• Generally focused on solving a commodity component of a process

• Common process

• One size fits all

• Lack of control over technology approach

• Lack of process control

• Single threaded solution

• Generally operate and deliver a larger portion of the components of a process



Managed services definedKey features and benefits of using a managed service

Predict spend based on what’s planned

Save, scale, and sustain while reducing risk

Pay for performance

Measure performance

standards

Multiyear engagement

Scalable and flexible utility

services

Based on output or transactions

Defined service levels

Our approach to managed servicesClients are asking us for help because of our deep expertise, client focus and global reach.

• Banking and capital markets• Insurance• Wealth and asset management

• Risk management and controls• Regulatory compliance and reporting• Internal audit• Tax compliance• Financial crimes compliance• Cybersecurity• Strategy and technology

What we are known for …

Industry knowledge

Sectors:

Traditional, business process outsourcing

EY managed services

“One size fits all” Specialized industry offerings

Industry knowledge Industry and sector focus

Client-specific solutions Solving problems

Technology enablement Automation

Work-unit based Output based

… and how our approach is different

Offshore delivery On-site, on/near-shore, offshore, combination



Offerings across the financial services industryWe are ready to provide a growing set of flexible managed services offerings.

Financial crimes complianceHelp with BSA/AML and economic sanctions compliance within global and diverse financial services institutions

Global regulatory reportingHelp asset management firms prepare for and manage the approaching regulatory requirements

Global Tax Reporting ServicesHelp report in accordance with the FATCA and CRS

Internal audit co-sourcingAssess, remediate and improve control issues, and elevate internal audit in identifying and addressing risk areas

TestingEvolve to the next generation of testing throughout the development lifecycle, user acceptance testing, business continuity planning (BCP) and disaster recovery (DR) compliance and controls, performance, and more

EY Insurance NexusTransform mid-market property and casualty carriers’ operations via hosting and ongoing support of the Guidewire platform

Third-party risk managementHelp with the build, enhancement and execution of scalable and sustainable third-party risk management functions

Offerings across all industriesWe are ready to provide a growing set of flexible managed services offerings.

Program managementDeliver scalable and customizable program management services and end-to-end solutions to manage portfolios and programs

Supply chain and operationsProvide comprehensive supplier risk management, holistic contract life cycle management and vendor governance services

Analytics and big dataProvide clients with analytics and big data capabilities, including tax analytics

Sector-specific offeringsHelp clients with sector-specific offerings to provide industry-leading solutions

Governance, risk and complianceAssist clients with risk-informed capital decisions, business process analytics, data visualization, enhanced compliance testing procedures, management of automated control environments and end-to-end vendor risk management

Robotic process automationProvide enterprise-class software automation solutions and capabilities and perform laborious and repetitive data handling tasks reliably

CybersecurityHelp with threat detection and response, identity and access management and threat exposure management

Specialized application servicesDeliver services based on specialized applications, such as SAP Performance and Optimization, SAS Oracle for P&U and Hyperion


Our Global Delivery Services networkWe are capable of supporting delivery around the world and around the clock.

• Florida• Georgia• Ohio

US and Canada

• Costa Rica• Argentina

LATAM and Mexico

• China• Philippines

APAC

• India• Poland• UK• Malta• South Africa

EMEIA

124+ countries supported

10+ years of global operation

20,000+ employees

Support to all regions of EY

18 language capabilities

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Sustainable cost leadership as a competitive advantage for financial institutionsFinancial institutions continue to face challenges in managing their enterprise-wide infrastructure costs. In most cases, they lack transparency into their cost base and consequently cannot generate actionable insights with any consistency without significant effort.

By sustainably reducing or eliminating infrastructure costs, financial institutions can be leaner, more agile and poised for growth in a changing economic and regulatory environment. They will be better positioned to free up working capital, and reallocate funds they saved, to invest in products and technologies to defend or grow market share.

To this purpose, financial institutions should position themselves to manage costs more effectively during the financial planning cycle rather than waiting to take action until after actuals have been posted, when reduction levers might no longer be available or may no longer be effective in the desired or required time frame.

Infrastructure costs account, on average, for 40% of a large global financial institution’s cost base.


Source: EY Global Cost Allocation Survey — Cost excellence: Viewing costs from a new perspective


When it comes to managing the infrastructure cost base, financial institutions can find themselves caught up in the academic exercise of cost accounting and allocation, moving costs from one side of the organization to another, rather than controlling or reducing the overall cost base of the enterprise.

We often see this process creating significant internal friction due to the lack of cost transparency, in particular around consumption data and billing rules. Most financial institutions spend too much time and too many resources investigating and managing allocation disputes, which gets in the way of the generating lasting results in cost cutting. This also distracts the organization from what really matters, which is optimizing the enterprise-wide cost base.

77% 58% 31% of financial institutions do not have a bank-wide service catalog but are aspiring to create one

of financial institutions do not use cost analytics across their entire cost base

of organizations use one dedicated allocation system across the enterprise

”If we get transparency, cost reduction follows.”— CFO, enterprise staff functions at a large US bank

We understand the challenges you face• Unclear, and often conflicting, cost accountability models, resulting in organizational friction around who owns which costs

rather than collaborating to reduce the enterprise cost base

• Complex allocation methodologies that do not reflect the way the service recipient manages its business

• Insufficient actionable cost insights, resulting in an inability to identify cost drivers and reduction levers, and to understand how changes in consumption behavior can lead to cost savings

• Multiple and conflicting methodologies creating inconsistent enterprise views of costs, challenges on cost transparency and spend accountability

• Cost analytics not covering the entire cost base, which impairs forward-thinking cost management

If not addressed, these challenges typically lead to the following:• Reduced margin and enterprise value

• Lower available liquidity due to higher working capital required to comply with living wills

• Higher regulatory capital requirements due to conservative assumptions on the Comprehensive Capital Analysis and Review’s (CCAR’s) pre-provision net revenue (PPNR)


Source: EY Global Cost Allocation Survey — Cost excellence: Viewing costs from a new perspective


Self-assess your cost management capabilities

• Are we actively managing costs before they are committed?

• Are we producing cost reporting that has the right level of detail?

• Are we managing costs or just expenses?

• Are we simply reporting numbers or are we generating actionable insights?

• Are we reducing costs as part of our cost management routines or only as one-off exercises?

• Do we have a game plan for continuous improvement or transformation of our cost allocations?

” It is not about making my slice of the pie smaller, it is about making the whole pie smaller.”

— Senior financial executive at a leading European bank

EY’s management principles to transform the way organizations manage and optimize infrastructure costs

• Governance — #1. Adopt an overarching governance to pursue bank-wide objectives as opposed to silo-based solutions

• Strategic execution — #2. Create a costing center of excellence to orchestrate efficiencies and bank-wide consistency

• Service catalog — #3. Adopt a common taxonomy to improve the dialogue across the organization and focus on bank-wide goals

• Methodology — #4. Balance simplicity and need for cost insights through a tailored costing methodology

• Drivers — #5. Adopt unit costing with allocation drivers linked to business fundamentals

• Data — #6. Refocus annual spending to improve data management at the source as opposed to investing in a series of point solutions

• Technology — #7. Leverage advancements in technology to increase cost transparency while minimizing disruption to current processes

• Cost analytics — #8. Focus on generating actionable insights rather than just reporting numbers

• Financial planning — #9. Manage the allocated cost base within financial planning and business reviews

• Resolution and recovery planning — #10. Leverage cost allocation to minimize the pre-funding required for operational continuity

• Tax and regulatory compliance — #11. Factor tax and regulatory constraints into management of shared services to avoid erosion of operational efficiency due to unforeseen tax and legal entity complications



What can you expect from EY? Thought leadership. Provide differentiated thinking and views on leading practices, emerging trends and innovative approaches to design and deliver top-tier strategic cost management transformations

Accelerators. Introduce robust accelerators and toolkits consistently across the implementation life cycle in order to expedite project timelines and minimize project execution risks

Benchmarking. Access to market data for comparative analyses of operational and financial metrics to identify efficiency opportunities

Global network. Bring a connected global network of costing professionals that are dedicated to financial services and that are used to working on cross-border transformation programs for large international financial institutions

Examples of services we provide are rapid cost diagnostic, cost allocation transformation, cost and profitability analytics, activity-based costing, technology architecture review, technology design and implementation, cost benchmarking and spend analytics, cost allocation support for regulatory compliance, managed services for cost processes and target operating model optimization.

Thought leadership

The allocation game: whitepaper on cost allocations and how financial institutionsshould manage their infrastructure cost base to create durable cost savings

Trends and market insights POV: Cost allocation and Transparency — Industry trends, methods, governance and reporting

Cost Allocation Global Survey: survey of senior financial officers of large financial institutions in the Americas, EMEA and APAC regions, supplemented with EY’s view on leading practices

Accelerators

Service catalog for financial services

Application demonstrationTechnology Market Scan: used to determine the optimal technology platform based on business requirements and current capabilities

Sidecar approach: repeatable and scalable process to implement enhanced functionality and capabilities without disrupting business as usual or incurring significant costs


PresentationsContactsRoundtable information and EY contacts


12:30 p.m. to 1:00 p.m. Registration and welcome lunch

1:00 p.m. to 1:15 p.m. Introduction of participants and agenda

1:15 p.m. to 1:30 p.m. Host remarks (Speaker: Steve Krueger)

Theme 1: Cost insights: are they hidden in plain sight?

1:30 p.m. to 1:45 p.m. EY presentation on spend analytics (Speakers: Sameer Gupta and Joe Kruse)

1:45 p.m. to 2:30 p.m. Roundtable discussion

2:30 p.m. to 3:00 p.m. Coffee break and networking

Theme 2: Cost allocations in the age of living wills: what’s next?

3:00 p.m. to 3:15 p.m. EY presentation on cost transformation (Speaker: Matt Polvara)


Theme 3: Co-opetition: is this the ultimate frontier for operational efficiency?

4:00 p.m. to 4:15 p.m. EY presentation on Managed Services and Industry Utility (Speaker: Suzette Massie)


4:50 p.m. to 5:00 p.m. Closing remarks

5:00 p.m. to 7:30 p.m. Refreshments and networking

2017 Cost Excellence Roundtable agenda EY Innovation Center | Union Square, New York

Roundtable information and EY contacts


Speakers

Steve Krueger Principal, Financial Services | Ernst & Young LLP | [email protected]

Steve joined Ernst & Young LLP in 2015 and currently co-leads the Managing Financial Performance and Risk (MFP&R) proposition for the US market, of which cost allocation is one of the offerings. In addition, Steve is the Banking and Capital Markets Lead for EY’s Performance Improvement practice, and he is one of the firm’s leading advisors to some of the largest financial services clients in North America and EMEA on matters related to finance, risk and treasury.

Sameer Gupta Principal, Financial Services | Ernst & Young LLP | [email protected]

Sameer is a principal in the Data and Analytics practice and a leader for the Advanced Analytics in Financial Services practice at Ernst & Young LLP. Sameer has been driving innovation in analytics in the areas of natural language processing and AI to new solutions in risk, marketing, operations efficiency, cost reduction and compliance. Sameer has a strong track record of working with C-suite leaders of Fortune 100 companies to develop and implement transformational business strategies leveraging advanced analytics, while generating material improvements for the bottom line.

Suzette Massie Principal, Financial Services | Ernst & Young LLP | [email protected]

Suzette joined Ernst & Young LLP Business Transformation Advisory practice in 2015. As a former partner at another large consulting and outsourcing firm, and as a senior executive at JPMorgan, Suzette brings clients a distinctive combination of consulting and industry experience. Her 26 years of global experience includes core banking, treasury services and back-office operations, among others, in North America, Europe, Latin America and Asia. Suzette is one of the firm’s leading specialists in managed services and industry utilities across a large span of banking business processes and products.

Matt Polvara Senior Manager, Financial Services | Ernst & Young LLP | [email protected]

Matt joined Ernst & Young LLP in London in 2012 and transferred to New York in January 2016 where he co-leads the Strategic Cost Management proposition and leads the development of Ernst & Young LLP’s cost allocation offering for financial services clients in the US market.Matt has led large transformation programs throughout the US, Europe and the Middle East, and he specializes in cost management, analytics and change management. Additionally, Matt has recently co-authored two EY thought leadership papers on cost management.

Joe Kruse Senior Manager, Financial Services, Ernst & Young LLP | [email protected]

Joe is a New York-based senior manager in Ernst & Young LLP’s Data and Analytics (D&A) practice. He has 13 years of experience helping detect, capture and sustain value through the use of advanced analytics. He has assisted his clients in projects to identify future revenue potential, better detect hidden signals within everyday activity, maximize operational efficiency, meet regulatory deadlines, better leverage tools and gain a greater understanding of available data both within and outside their organizations.



The roundtable was held at the EY Union Square office, part of EY wavespaceTM, a global network of growth and innovation centers to help clients achieve radical breakthroughs.

“ Organizations face continuous disruption at an increasingly fast pace, so senior business leaders are passionate about driving change to stay competitive. Many believe in radical transformation as the path forward to achieve their business objectives, but they don’t necessarily know how to start. The EY wavespaceTM network encourages clients to be fearless about identifying dramatic ideas that could ultimately lead to dramatic breakthroughs.”

— Norman Lonergan, EY Global Vice Chair, Advisory Services

EY Innovation Center Union Square, New York

The wavespace centers expand EY’s existing network of innovation centers developed to help clients face the challenges and opportunities of continuous change, digitization and disruption. All locations feature a shared methodology and platform that combines EY’s experience in areas including disruptive technologies such as artificial intelligence, robotics process automation (RPA), blockchain, data analytics, digital, customer experience and cyber security, and EY’s deep industry domain and regulatory experience.

In a multi-million dollar investment, EY will increase its current network of 15 locations by adding centers in the Americas, Europe, the Middle East and Asia Pacific regions over the next year. The new centers will be located in Amsterdam; Atlanta; Mexico City; New York (Chelsea); Santa Monica (Silicon Beach), Calif.; São Paulo; Trivandrum, India; and Toronto. Each center has a range of technology and market focus, with dedicated teams of multi-disciplinary practitioners in disruptive innovation to help create a new market or a new way of creating value.

For example, EY professionals at locations in the wavespace network have:• Developed more than 50 business processes enabled

by blockchain technology for customers in the financial services sector, including an identity management platform that provides more secure and efficient onboarding of customers and identifies potential regulatory challenges;

• Helped an automotive OEM develop new mobility services, including premium and on-demand taxi services, smart parking and ride-sharing, and ran market-test pilots in major cities worldwide;

• Created an innovation pop-up lab for a financial services client to drive development and deployment of new technologies, products and services, and business models across the organization.

EY centers are located in Americas: New York (Union Square): San Francisco, Seattle, Silicon Valley, Tel Aviv; EMEIA: Berlin, Dubai, London, Paris, Madrid, Warsaw; APAC: Hong Kong, Singapore, Shanghai, Sydney.


EY contacts and Cost Allocation website


Steve Krueger is a principal with Ernst & Young LLP in New York. He co-leads the Managing Financial Performance and Risk (MFP&R) proposition.

Matt Polvara is a senior manager with Ernst & Young LLP in New York. He co-leads the Strategic Cost Management offering.

For a conversation about cost allocation and management, please contact us:

Hosts

Steve [email protected]+1 212 773 6624

Matt [email protected]+1 917 515 3018


For more information on EY’s Costing Allocation Practice, as well as access to the following publications, please visit our website at: www.ey.com/costallocation

Key contributorsJoe Kruse

Sameer Gupta

Suzette Massie

Partner/Principal review panelAdam Girling

Andrew Wilson

Anita Bafna

Bill Thomas

Clayton Baker

Geoff Burkholder

Keith Novek

Cost Allocation Global SurveyIn 2016, EY conducted a global survey with 13 global financial institutions, across the Americas, EMEA and APAC. The survey report combines participant responses with EY’s view on leading practices and experience in designing and delivering cost allocation and cost management transformation programs.

The Allocation GameEY leadership within the cost offering collaborated to write a thought-provoking whitepaper on cost allocations and how banks should manage their infrastructure cost bases effectively and efficiently.

EY | Assurance | Tax | Transactions | AdvisoryAbout EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Advisory ServicesIn a world of unprecedented change, EY Advisory believes a better working world means helping clients solve big, complex industry issues and capitalize on opportunities to grow, optimize and protect their businesses.

From C-suite and functional leaders of Fortune 100 multinationals to disruptive innovators and emerging market small and medium-sized enterprises, EY Advisory works with clients — from strategy through execution — to help them design better outcomes and realize long-lasting results.

A global mindset, diversity and collaborative culture inspire EY consultants to ask better questions. They work with their clients, as well as an ecosystem of internal and external experts, to create innovative answers. Together, EY helps clients’ businesses work better.

The better the question. The better the answer. The better the world works.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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