The capital markets environment continues to evolve with unprecedented speed. Complexity is on the rise, even as firms struggle with downward pressure on margins. The industry, still dealing with the fallout from the financial crisis, is struggling to stay abreast of a wave of regulatory change. Revenues from once-lucrative areas such as securities lending have fallen off. Tried and true operating models are exhibiting signs of age and obsolescence. And even as the landscape continues to shift, competition between firms remains fierce.
Firms will cling to the status quo at their peril. The business landscape is strewn with once-dominant companies that chose to dismiss similar warning signs in their respective industries. The financial services sector is no exception. Players of all sizes are rethinking their operating models in response to a wide range of external forces.
The rules are changing. Against a backdrop of change, pressure and uncertainty, many financial services firms are facing a simple choice: transform or perish.
It’s different this time
Organizational transformation is nothing new. The scale of the change facing the industry has been seen before, many times over. What is different this time, however, is the fact that an increasing number of firms are assessing the organizational transformation exercise through the eyes of their customers and in relation to the business model those customers want in the future. This represents a significant shift from the manner in which financial services organizations have tended to approach such transformation exercises in the past.
Preparing for a new operating environment
Increasingly, successful providers will be those that are able to modify their processes in a manner that enables them to optimize customer benefit. Enhancing these processes will, in many instances, influence changes in the overall design of the product portfolio. In this new operating environment, those firms able to offer a differentiated product portfolio, supported by an operational infrastructure that can be easily scaled up or down to mirror market trends and client needs, will be the providers that will dominate, stealing valuable market share from the competition.
This brand of transformation necessarily requires specialization and horizontally integrated operations, a model that other industries have been following for many years. In these cases, it is common to see dramatic systems-retooling processes, aimed at improving performance and standardizing and simplifying technologies.
Convergence of the competitive kind
An increasing number of financial services firms are looking to consolidate, diversify their product portfolios and enter into new, strategic, technology-focused alliances, both to help gain entry into new markets and as a defensive necessity. For example:
- Investment banks are leveraging operational environments across other parts of their business, such as using their prime brokerage infrastructure to provide clearing, settlement and financing services to their execution clients.
- There is a growing trend, particularly in Europe, toward local custodial, transfer agency and hedge fund servicing businesses consolidating into global or regional groups.
- Outsourcing relationships are increasingly moving toward ‘partnership’ models, in which two or more firms enter into arrangements with service providers to develop a key product capability with technology as the enabler.
- More central service providers and securities depositories are migrating deeper into the asset servicing business, posing a threat to the dominance of custody banks in certain aspects of core asset servicing.
Achieving the target operating model
Deciding to transform the business model to adapt to market and client needs is the responsibility of the executive leadership team. Based on the particular firm’s business strategy and unique market dynamics, the target operating model, which will serve as the cornerstone of the new operating model, should encompass the following guiding principles:
- Operations and technology must be automated, low cost, robust and scalable.
- The operations and technology functions should lend themselves to extension to other parts of the business.
- Traditional geographical delineation of target markets is obsolete. Client needs should be parsed according to developed versus developing markets.
- Redesigned operating models should differentiate between generic and higher margin products in order to leverage scale and low cost with the former and revenue and margin for the latter.
- A joint venture or consortia structure can deliver significant benefits, but is not easy to achieve.
Putting the plan into action
Major transformation programs entail a certain degree of risk. In order to maximize the prospects for long-term success, these complex and wide-reaching exercises must be managed with an eye toward controlling risk. Among the more prevalent threats to success are leadership teams that underestimate the intensity of the effort or the resources required, a lack of clarity regarding the proposed future state and insufficient internal motivation to change.
Leading successful operational change hinges on a clear understanding of the business imperatives and operational requirements, while it simultaneously involves shifting the firm’s focus to a strict process improvement agenda. Among other things, putting the transformational plan into action requires the establishing of a set of guiding principles, the identification and addressing of any potential barriers to implementation and an analysis of business impacts, with an eye toward quantifiable benefits.
Leaders need to think differently about their organizations and challenge the status quo in order to effectively reinvent their operations and position themselves for long-term growth and profitability.