Bank management be warned. Around the world, investors are being stung into action by the collapse of share prices and murky accounting tricks aimed at covering up corporate fraud or failure. 'As a result the pressure on management to become more transparent, and to innovate and unlock shareholder value on a sustained basis is greater than it has ever been before,' said Christopher Gentle, director of research at Deloitte Consulting. In response to this pressure, cost-reduction had become the dominant mantra for bank management and had delivered some results, along with business or product innovation aimed at extending relationships with customers and raising new revenue. But vigilant shareholders demanded a more integrated approach from their managers. 'Sir John [John Bond, chairman of HSBC], made the observation that a lot of attention is given in the banking industry to product innovation. And he said if you achieved this, it might give you two to three months' lead time over your competitors. 'But he added that if you achieve process innovation - or the way you deliver and sell products - you might get 12 months' lead time,' Mr Gentle said. This raised the question of whether banks ought to 'own' products, or the distribution channels through which those products were sold, he said, and in the new investment climate the answer would be found in what was best for the share price. In their first reaction to the market downturn, most financial services firms had looked to cut costs by laying off staff, he said. In the United States, 1.4 million people were laid off in the first 10 months of last year, with financial services firms prominent among companies sacking staff. It was no surprise that financial services firms looked first to reducing head-counts, a Deloitte study called 'Fit for the Future' noted. Personnel costs were easily the largest expense item for financial firms, exceeding 60 per cent of total non-interest expenses for some institutions. Those costs were driven sharply higher during the 1990s as commercial and investment banks expanded to serve booming markets in such areas as online securities trading, mergers and acquisitions, underwriting and initial public offerings. Employment in investment banks swelled by four-fifths over the past decade. But even when planned with care, layoffs were at best only one element of a strategic cost reduction programme, Mr Gentle noted in the study. What investors wanted to see was a more creative approach to re-engineering business processes. 'In both good and bad times, firms that successfully increase their operating efficiency are rewarded by investors,' the Deloitte study noted. 'For example, during the period of strong economic growth from 1997 to 2000, the large banks with the best efficiency ratios saw their share prices rise by an average annual rate of return of 13.6 per cent, compared with an average annual share price increase of 9.6 per cent for the 100 largest banks. However, the large banks that showed the greatest improvement in efficiency fared even better, with an average annual share price increase of 19.2 per cent over the period. Firms that continued to improve efficiency were rewarded by investors with higher share prices, the study noted, and optimising operating efficiency should be a linchpin of corporate strategy in both good economic times and bad. Too often, financial services firms focused only on controlling costs when they were forced to respond to a slowing economy. Many firms then rushed to reduce staffing levels and other expenses to reflect reduced business volumes. Yet volume-related reductions alone left firms no more efficient than they were before, the Deloitte study warned. It said that unless they were targeted carefully, such reductions could undermine a firm's business goals and value proposition.