Friday, November 30

Cutting Costs or changing cost structures

Ok, so this hasnt been thought out fully and I typed this on my blackberry late in the night while on the tube. But what the heck, if I cant witter on in my blog, when where else can i do it?

I keep on hearing about how we have to cut costs because we have to improve
our margins as there is greater competition.

Cost cutting requires a wee bit of imagination, some discipline and a beady
eye out on the bottom line. It is amazing how many people have an admirable
dedication on the top line growth but do not think about the bottom line

And typically, bottom line inflation lags and is of a greater magnitude
than the top line inflation. So you start getting higher costs right when
you can least afford them.

Counter-intuitively and this requires courage for people to push hard, best
time to think about costs is when there is no cost pressure. That's where
your margins are fatter in good time while you have scope to cut in bad
times, unlike your competitors.

So what you need to think about is to think 3 years ahead and change the
cost structure of your business, not cost cuts. Some examples

Invest in a workflow process and system which works on an exception basis
with a workforce which is location independent.

Can you pay your middle office people based upon error rates?

Why do you need your middle and back office people in with the traders? For
that matter why can't they work from home? For that matter, if you have
security and compliance sorted, why can't you devise a system such as The
Seti project, with temporary workers docking on to process, get paid by the
transaction, and dock off?

Think about changing your cost structure, not muck around with shipping a
process here and there, anybody can do that, what's the special thing that
you are coming up with?

A generational jump. Remember that 80 percent of a products lifetime
revenue is earned by the early innovators, 20 percent is squabbled over by
the 80 percent who follow.

So whether you are providing white label trading, operations, processes, IT
processes, market making, what have you, to reduce the cost of work, think
about how to change the structure of your cost and try to turn the
structure inside out, sideways, mutate it, don't mess about the edges.

All this to be taken with a grain of piquant salt!!!

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