For many years, high margins allowed wholesale banks to operate in product-aligned "silos," with traders and sales desks in the front office receiving customized—and often manual—support. But this environment had a high price: duplication in trade processing, account maintenance, and support functions across products. When the economy headed south in 2000, all banks began cutting their management and support staffs, automating manual processes, and streamlining IT budgets, thus reducing costs by 8 to 12 percent in many cases.

Tactical improvements have their limits, however. A handful of leading banks are thus starting to take a more strategic approach to improving the performance of the back office—an approach that makes it possible to achieve further savings of 10 to 20 percent while improving service, driving innovation, and generating new revenues. To accomplish all this, banks must rethink both the fundamental configuration of the back office and the way it works with the front office.

Reconfiguring operations

To reconfigure operations effectively, banks must take a much harder look at their options for creating shared services, utilizing lower-cost locations, and outsourcing selected functions. Players that apply all three levers will achieve the greatest gains.

Create more shared services

Our experience indicates that no...