Cost / Efficiency Management

Our Approach

Product costing projects are frequently seen as the answer to all questions regarding profitability. Expectations from management are high and are subsequently disappointed since the results do not show the easy and clear solutions as hoped. This is particularly painful since product costing exercises are time consuming projects involving a high amount of people from the institution.

Starting from these negative results, we developed adjustments to the classic product costing projects to let them produce results faster and with far less effort. Our concept is based on the concept of Activity Based Costing but includes several modifications and pursue following results:

  • Based on detailed analysis of productive product/service processes and workflows (activity and responsible)
  • Analyzing operating efficiency which cannot be measured by financial analysis
  • Discovers shortcomings and bottlenecks
  • Focus on Direct as well as Indirect Expenses
  • Analyzes capacity and is key to develop strategic plans
  • Relates Process Cost to other cost factors like risk and liquidity
  • Pricing and break-even point analysis per product/branch/staff

Set up of Project

Our analysis has the objective to separate out the various sources for cost within a financial institution. Then we examine them separately. In most of the cases, the task is to analyze the profitability of loan or deposit products.

We start to look at the cost of funding. We differentiate between current funding cost, influenced potentially by subsidized funds and market rates.

Then we look at the distribution of loan loss provisions among various dimensions. We like to see how the loan losses distribute among products, branches, sizes and all combinations thereof. This frequently gives an indication about problems in products and branches and it helps to discover potential concentration risk. As a result, we see the various sources of cost lined up to each other, so it is easy to see the comparable alternatives. Examples are:

  • What are the necessary improvements in the operational expenses, assuming an increase in loan loss provisions or a disappearance of subsidized funding?
  • How can cost be reduced assuming an existing client repeats a loan?
  • How can be products be designed (pricing) from existing processes?
  • What are the minimum amounts necessary to break-even on an individual loan?
  • How do branches differ in productivity?

In addition, the analysis process usually delivers a series of quick fixes. These are improvements discovered during our interview process. It helps that we are within the institution, observing the processes and that employees consider us neutral and speak openly about their suggestions. We can compare our findings to the experience we made in other institutions (fifty) and can compare the individual institution in an anonymous way to its peers.

Tools

The instruments we are using are self developed spreadsheets and databases. These spreadsheets allow flexible adjustments to the needs and data sources of the individual institution. As part of the consultancy, the institution receives the full set of spreadsheets, including handbooks and guides, a final report, and our cost management textbook.

We always offer a permanent assistance …


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The Costing Model

  • Costing tools are becoming more and more important for MFIs. During “hot” phases cost and efficiency was not of prime importance. Nowadays capacity was increased to serve future growth, indirect expenses need to be adjusted for slow growth and new levels of efficiency are necessary due to market pressure and to be prepared for consolidation. PPP’s Product Costing Model is a management tool based in ABC Costing.
  • This core product of PPP provides an in-depth analysis of the operations as well as the business potential and the current shortcomings. Focus on processes but puts them in relation to other sources of cost like credit risk and liquidity Time measurement is used to discover quantitative and qualitative issues, portfolio analysis puts operating expenses in context,  qualitative observations are added  to analysis. Immediate changes can be implemented to improve efficiency and reduce bottlenecks.

Case: PARTNER MFI

  • PARTNER Microcredit Foundation is one of the top three Microfinance Institutions (MFIs) leading the BiH market. Tuzla-based PARTNER started its microcredit operations in 1997 with support of the European branch of Mercy Corps (MC).
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