Client Insights, Consultant
IBM Center for Applied Insights
Not many people empathize with financial markets firms these days. Yet, they are facing a one-two punch of increasingly onerous regulation combined with increased competition (a result of more demanding customers, technological change, globalization and the downturn in the global economy).
Industry experts estimate that 15-20% of the market share for wholesale and investment banking will be reshuffled in the next few years. To survive let alone thrive, financial markets firms must adapt – by changing the way that they operate.
Working with Broadridge Financial Solutions we looked into how financial markets firms are responding to this demanding environment – and specifically the changes they are making to their operating models – that is how they organize their resources, business processes, systems, information assets, etc.
The research highlighted a leading group – who excelled at both compliance and innovation. This group had five key things they were thinking and doing differently than the rest:
Thinking marketplace first, “factory” efficiencies second
Designing operations around client interactions, not vice versa
Cultivating agility – and an ability to see what others don’t
Building and use scale, but not always in expected ways
Partnering to extend their capabilities – and their thinking
These firms have a different perspective on operations and how it contributes to the business. The distinctions between front, middle and back office are becoming less distinct. As a UK-based Chief Operations Officer at a Universal Bank observed: “We must make sure changes enhance the whole process - It’s no good having a Rolls-Royce in the front and a Mini in the back.”
The leaders are looking at how operations can positively contribute to the business – through consolidation and greater efficiency of course, but also through creating the flexibility to scale resources and adapt to market conditions, facilitating faster product development and enabling innovation.
The leaders are also more open to working with external partners – and see the positive value to be gained through collaboration, for example accessing the technology and resources of an external partner. Leaders outsource more of their business processes, in particular, traditional areas like back-office accounting, settlement and clearance and reporting systems.
Success in these areas will likely encourage leaders to forge ahead into sourcing more complex functions such as reconciliations, data management, tax reporting and corporate actions. But what they outsource is perhaps of less interest than how they outsource. The leaders outsource with a business objective in mind, seeking to get the best from their partner, whereas those lagging tend to see the potential benefits in a more limited way – focusing on cutting costs of the back office.
And importantly, the study points to these differences in attitude feeding into improved results. Those who recognize how operations can contribute to the business and see collaboration as a way of improving business outcomes are rewarded with improved customer satisfaction, faster product introduction, improved regulatory compliance and improved access to information.
So what are the implications, for firms operating in financial markets as well as those in other industries who are trying to optimize the contribution of their back offices? For financial markets firms - focus on achieving agility, scalability and customer centricity, with the potential help of external partners. Many of those currently lagging are planning to evolve their operating model over the next three years. However, there is no time to delay, as the leading firms are forging ahead, and gaining market share as a result.
For those in other industries seeking to optimize their back office operations, this study also provides valuable insights. The financial markets industry is an extreme case where technological change, globalization, market turmoil, low switching costs and significant regulatory change have come together accelerating required operating model change. But the drivers are similar in many other industries – and we are observing a transformation in approaches to outsourcing – focusing more on sharing expertise and delivering business value rather than simply efficiency savings. Increasingly, the winners, across all industries, will be those who exploit these new capabilities to the full.