Over the years, many practices have been developed to analyze banking profitability. In most cases, the profitability of a product or service is often simply measured via arbitrary cost allocations. Such methodologies do not coherently align strategic intent, value and profitability in a holistic manner. The Multi-dimensional Profitability Model (MDP) addresses these shortcomings.
While cost allocation is a well-established concept, the MDP analysis offers a structured approach to replicating value drivers as a means of allocation for pooled revenue. By aggregating the two elements of cost and revenue a dimensional profitability analysis can be formed.
To understand the true cost and profitability of a bank's businesses, it is important to have a clear and consistent view across multiple dimensions such as: geography; products; customers; etc. The clear view into each of these dimensions provide actionable insights that are crucial if business leaders are to make informed decisions and effectively drive business growth.
Traditionally, the allocation of costs has been arbitrary and used to support the management of budgets, as opposed to a tool to optimize business performance. Often this arbitrary approach involves defining cost drivers for all activities (e.g. reporting, analyzing, etc.) thus making the process overly complex.
The MDP model with its driver based approach provides a more accurate and informed picture, linking activities performed with the costs incurred and income generated from them. This in turn helps to provide insight around cost optimization and revenue efficiency.
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