Risk: Operational Leverage

Earnings quality is enhanced by acting on a clear understanding of the relationship among revenues, risk costs and operating expenses. This is operational leverage, which is the systematic application of process improvement to drive greater amounts of revenue to the bottom line. Many growth strategies are crippled by inattention to their affect on risk costs and operating expenses. Better information guides the allocation of resources to those revenue sources with the greatest positive net effect. Perspectives that understand these relationships will result in better alignment of the organization with the business opportunities.

Operational leverage encompasses all of the activities and processes required to support the sales and services of a business line or institution. The objective is to focus all activities to support the strategy while identifying activities, processes, products, etc. that detract from the strategy. It can be as broad as aligning delivery processes with the stated value proposition or as narrow as identifying steps in a credit approval process that can be changed or eliminated. It differs from traditional re-engineering in that there is a greater focus on effectiveness — doing things better, rather than efficiency — doing things with fewer resources. There are five primary areas where we focus:

1. Customer acquisition. Novantas has developed advanced segmentation approaches to improve portfolio performance, customer targeting, and offer development either as part of a broader business line strategy or focused in consumer lending and credit card areas. In addition, our approaches are designed to decrease time to decision.
2. Create enhanced profitability information. Novantas helps our clients create enhanced profitability information to help with decisions on customer segmentation, targeting and solicitation. We provide insight into the cost of alternative consumer credit strategies, including risk, collections and other operating costs.
3. Build and enhance loan and deposit pricing models. Combined with Novantas’ deep understanding of customer elasticities, we help clients build and enhance loan and deposit pricing models that capture advanced perspectives on funds transfer pricing, risk-based measures of credit cost and credit-sensitive operating costs.
4. Business process alignment. This broad-based approach improves effectiveness in a business or institution. Our objective is to enhance the alignment of all business processes with the strategy by identifying how business processes enhance or detract from performance. We have extensive experience improving business operating models that result in higher business margins through improved efficiency and effectiveness. Where others will focus on changes that equate to “do more with fewer people,” we find and help implement ways to do things differently that make businesses more effective and more efficient. Areas of focus include organizational design, performance measurement and incentives, support services effectiveness and risk-based decision processes.
5. Management and monitoring. An integral part of our operational leverage capabilities, we improve the results of line and limit management in consumer credit portfolios. We have models of customer behavior that provide insights on utilization, pre-pay, and migration behavior linked to changes in customer credit profiles. We help clients with approaches to pre-emptive debt management.