COMMENTS ON ABC ANALYSIS FOR THE CO-OPERATIVE BANK SUBMITTED BY GROUP-IV (DEEPESH,GYAN,JYOTI,NEERAJ, RAJA AND UJJAYINI) 1.

Cost and profitability information on Personal Service Products As the first attempt, the bank consolidated personal and corporate account processing task. For example, the back office tasks of personal banking operators, previously processed in branches, were consolidated into a Personal Customer Service Center. At the same time, the bank increased cross-selling activities and offering many kinds of financial products and service. However, still its cost-income ratio was high and it was a small player in U.K. So, the bank started the second project to classify unprofitable products and customers, to improve its costincome ratio by modifying its products and services. Key elements were overhead reduction, reengineering of business process, product profitability, customer profitability, and segment profitability. Cost Information - Applying ABC Existing cost system was based on a traditional responsibility accounting system that measured expenses for geographic and departmental cost centers. The bank measured product revenues using fee income and net interest, but the estimated costs of producing these revenues were not identified. The bank tried to change it to Activity based Costing system, and allocate operating expenses to products and customers. To establish ABC model, cross-functional team was formed and began to gather process data. At the same time, the bank hired consulting company in order to assist mode development and obtain advice for re-organization and action-implication. The team considered in terms of its activities, cost driver (product or customer base), and period. They identified about 210 resource cost pools divided into operational staff, infrastructure, and miscellaneous from last 3 months. And they identified 235 activities undertaken at the bank and mapped them. Matching resource costs to the activities, the team assigned the total costs to each activity. The cost of each activity was traced to the bank products. To do that, the team defined activity cost drivers for each activity, and calculated activity cost driver rates. The team identified 50 similar product groups. Product costs were calculated by determining the quantity of each activity cost driver used by each of the products, multiplying these quantities by the associated activity cost driver rate, and summing all the activities used by the individual products. As an exemption, sustaining costs, costs of resources that were not directly related to any products, were not assigned to product costs because they supported the organization as a whole.

Profitability Information Product profitability was calculated by subtracting the cost of all activities from the new interest revenue earned from each product plus the fees of customer services. Regarding asset and liability products, a transfer interest rate, LIBOR+1/4%, was used to represent the rate at which excess funds were invested. Since ABC analysis revealed each product costs clearly, the profitability of each business was revised. In fact, some were failing to generate adequate returns, while some were actually highly profitable products. In addition to ABC analysis, the team analyzed the entry product at the customer profitability analysis. All cross sales were assigned to entry product. The results showed the vast majority of cross sales originated from Current Accounts.

COMMENTS ON ABC ANALYSIS FOR THE CO-OPERATIVE BANK SUBMITTED BY GROUP-IV (DEEPESH,GYAN,JYOTI,NEERAJ, RAJA AND UJJAYINI) 2. Process of developing cost and profitability information Developing process of cost information The bank changed its costing system to Activity based Costing, and allocate operating expenses to products. To establish ABC model, cross-functional team was formed. The team considered in terms of its activities, cost driver (product or customer base), and period. They identified about resource cost pools which were processing transactions and maintaining accounts. While this classification was acceptable, the sample was not appropriate. Because their data came from past data, it will limit the accuracy for its costs. In addition, since ABC uses the past data basically, it will be varied in the future. This is a limitation of ABC. Finally, they identified activities. Matching resource costs to the activities, the team assigned the total costs to each activity. Above is the process of cost measurement. At the final step, the team did not assign sustain costs to product cost. We disagree with this decision. All costs should be allocated to product cost. Developing process of profitability information Regarding profitability information, the profitability is calculated by subtracting the cost of all activities from the new interest revenue earned from each product plus the fees of customer services. ABC analysis revealed each product costs clearly, and the team realized that some products were failing to generate adequate returns, (EXHIBIT 8), while some were actually highly profitable products. In addition to ABC analysis, the team analyzed entry products. This is notable analysis. If they rely on only the result of ABC analysis, Current Accounts were regarded as one of none profitable products. However, because of this analysis, they could find that Current Accounts could generate profits through cross sales. 3. Strategy to deal with unprofitable customers To improve the Customer Profitability overall, we should try to upgrade un-profitable customers to profitable customers. From activity cost, we can see that the cost to maintain 1 profitable account and unprofitable account are approximately the same while the revenue generate from these two type of account are significantly different. To eliminate these differences, the Co-op Bank should separate these two types of customers by offering special customer program. For example, if balance of the account always exceeds xxx or spending in their VISA exceed some certain limit, the customer can join a special club, and thus they can enjoy some exclusive benefit. This would reward the profitable customers some privilege while give more incentive to unprofitable customer to upgrade their status. In parallel to this change, the bank should also consider refining their OH operation to be more efficient and consider increasing fee or set limit to certain personal transaction. For example, certain class of customer can only see the bank staff a certain time for free, after that they would be charged for dealing with the bank teller. This would help to motivate customer to use electronic or webpage to search for information instead of personal banking, EXHIBIT 6. The bank, thus should reduce the OH burden by simplify the OH structure, reduce number of branch office and reduce the activity cost. In short, unprofitable customer is inevitable in every business. However, the important is to make this only temporary and the business has to transfer them to profitable customer as soon as possible by give them enough incentive to do that. This can be achieved only by reasonable cost structure and adequate customer strategy. 4. Compatibility of the Strategy with the bank s Mission Statement and Statement on Ethical Policy The Co-operative Bank offers its customers the usual variety of financial services

COMMENTS ON ABC ANALYSIS FOR THE CO-OPERATIVE BANK SUBMITTED BY GROUP-IV (DEEPESH,GYAN,JYOTI,NEERAJ, RAJA AND UJJAYINI) with a strong emphasis on ethical and environmental concerns. The bank has an ethical policy which it drew up on the basis of consultations with 30,000 customers, both corporate and individual. This policy statement sets out the bank's position in six areas: human rights; the arms trade; trade and social involvement; ecological impact; animal welfare; customer consultation, EXHIBIT 5. The bank s attempt to focus on developing profitable relationship is compatible with its mission statement and ethical policy. The bank tries to provide different levels of services to customers based on their contribution to the bank. It is; therefore, fair to all the customers. The customers who are willing to pay more would get higher level of services from the bank. The decision to move away from the traditional branches to create high-tech service centers would have a positive impact on levels of service and customer satisfaction. However, it would have the reputed negative effects of working on employees. The bank has been criticized for the loss of jobs among branch personnel, although this was balanced by the creation of Service Centre jobs. Customer profitability analysis might emphasize too much on the measurements of the business success solely by financial return for the shareholders. It should develop co-operation for sustainable stakeholders.