The Co-Operative Bank

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For example: Open and Close accounts is driven by ‘Number of accounts open/closed’, which registered 57,951 observations over the sample period. However, Marketing and Sales is driven by ‘Number of accounts opened’ which totalised 62,120 between Mar-May1993. We believe that both the activities and the cost drivers could be refined/fine tuned (as previously mentioned) in order to improve accuracy and consistency in cost allocation.

7. These products are still relatively new and were part of Management’s strategy to improve the bank’s positioning in the more competitive setting it has faced in recent years. By analysing Exhibits 7 and 8 we conclude that the allocation of Marketing and Sales is distorting the profitability analysis. Since it is currently based on number of accounts opened, the majority of the expense will ‘fall’ in products that are currently gaining market share and that are in a customer acquisition stage (while there are still not enough revenues to cover for these expenses). Also, as mentioned in the previous question, it is not clear whether the current allocation of Advice on Investments and Insurance should be fully allocated to ‘Independent Financial Advice’ or if part of the cost should be spread among other products, to the extent that advice has been provided on Co-operative Bank’s products as well.

On the other hand, these trends are not so strongly noticeable in more established product such as the Current Account Plus, as they have stronger revenue bases (wider customer base), that can definitely accommodate increased marketing costs from market share expansion, for instance.

8. Sustaining costs refer to costs of resources that were not directly related to any products (i.e., they support the organisation as a whole). These include strategy, planning, human resource management, and information technology development.

For decision-making purposes, we understand that the allocation of these costs might distort the analysis: the criteria for their allocation is not clear and can be easily manipulated. In these situations, maybe the analysis of the Direct Profit would provide more useful information, provided that the ABC cost system has been refined (in accordance with the matters that have been discussed in previous questions).

9. We believe that Project SABRE has addressed mainly the needs related with the profitability analysis of products, customers and segments (although some of the issues mentioned above need still to be tackled). From the goals established for the project, we believe that Overhead reduction and Re-engineering of business processes have not been covered yet. Although we understand that the latter could represent a next step after the ABC system is fully operational, the case does not mention clear processes or measures to deal with the Overhead reduction issue