Financial services executives know they need to simplify their organisations to support sustainable growth and to adapt to secure a successful tomorrow. But are they approaching simplification in the right way to thrive in the longer term?
Everybody knows that most financial services organisations, apart from the most recent disruptors, in financial services are far too complex. There is a huge amount of legacy which is impairing the ability to adapt and meet the rapidly evolving needs, requirements and expectations of customers.
Customers want convenience, efficiency, information, education and a seamless, frictionless experience across multiple channels at a time that suits them. They expect rapid deployment of new tools and innovations, which are not just relevant, but also engaging. They are looking for transparency and trust.
Simply put, they want their banking, insurance and investment transactions to be simple. And most of today's financial services organisations are anything but simple.
It's not for lack of trying. Most financial services firms are now executing on dozens – sometimes hundreds – of different initiatives that, ultimately, should simplify the business. Some of these efforts represent unprecedented change agendas, with all of the associated bear traps.
KPMG member firms are seeing some banks and insurers replace key elements of their core systems and consolidate their ancillary systems in an effort to rationalise their IT estate, modernise their capabilities, reduce costs and, at the same time, provide the capabilities to adapt and evolve their business models to secure future growth.
Others are working on more focused pain points and complexities. Some are rethinking the fundamentals of their products and their wider portfolio of products. Others are examining their current financial, business and operating models, and outsourcing arrangements. Many are working on simplifying specific client and risk pain points like KYC, claims and remediation.
Simplification is as much about creating and applying the capabilities to support improved customer experiences, innovative propositions, speed and automation, scalability and increased visibility as it is about cost efficiencies.
However, dig into the investment case behind many of these initiatives and, interestingly, most are founded on return and efficiency metrics such as Net Present Value (NPV), Internal Rate of Return, and cost and headcount reductions.
Of course, these are important metrics: Shareholders expect returns and competitors are differentiating on cost and efficiency, but these should not be the only drivers.
We are seeing some banks and insurers replace key elements of their core systems and consolidate their ancillary systems in an effort to rationalise their IT estate, modernise their capabilities, reduce costs and, at the same time, provide the capabilities to adapt and evolve their business models to secure future growth.
Cost efficiency is far from the only benefit that can be accrued from simplification. Simplifying what you do today doesn't necessarily set you up for future success if the market is changing rapidly and business models are being disrupted. Simplification also has to support changing what you do tomorrow.
A simplified architecture can also support more innovation, for example, developing, testing and launching new propositions and getting to market faster and cheaper. For example, a simplified core banking system would allow firms to make upgrades and integrate new technologies in a fraction of the current time. Entering into new alliances and partnerships will be more feasible and viable for a simpler business.
It should also support scalability, reduce future cost, increase the speed of change and provide improved risk management and resilience. Straightening out the spaghetti bowl of systems and processes also creates better visibility which, in turn, should allow financial services firms to get much closer to customers, improve operational resilience and control over performance, and better understand and anticipate risks. Simplified control environments and processes should help organisations adapt quickly to future regulatory changes.
Perhaps most importantly, simplification of the business allows decision-makers to focus their scarce capital on investments that actually matter to the business and its customers. Just imagine the clarity of mind that would come from overseeing a vastly simplified financial services operation. IT budgets would be focused, innovation investments would be highly targetted, and waste and duplication would be eliminated. Every investment dollar would count towards the long-term health of the organisation.
Financial services executives are well aware of the benefits of taking a broader view on the case for change, beyond cost. They know that improved capabilities, agility, risk management and investment prioritisation is inherently valuable to the organisation over the long term. But they often aren't sure how to quantify them and reflect them in the investment case.
That is not surprising. What value do you put on getting an as-yet-undefined product to an as-yet-undefined market in an as-yet-undefined space of time? How do you quantify the value of decision-making clarity in financial terms? What does a happy and satisfied customer look like on a balance sheet? These are not simple calculations to make.
The problem is that the 'harder' benefits of the investment case – the cost and risk considerations – are very clear. Simplification often requires organisations to break the status quo. Sometimes that may mean investing into new systems, tools or capabilities. It may require new financial, business and operating models and ways of working. Investments will be high and no amount of head count reduction will balance the equation in the short term.
Somewhat counter-intuitively, many executives are also worried about the risk of removing the complexity. They recognise that some of their current systems, processes and models are stuck together with the IT equivalent of duct tape and glue. Nobody really knows for sure what the unintended consequences are when ancillary systems are shut down. The challenges and risks of major transformations are significant.
Simplification should never be the primary objective in and of itself. When simplification is the only objective, investments in improvements and innovation will get penalised. But that only reinforces the status quo.
While assessing and quantifying the non-cost benefits can be challenging, it is not impossible. We help banks, insurers and asset managers do it all the time. It does need a strategic mind-set and a more holistic assessment of the broader and longer-term benefits that simplification can deliver, including support for future growth. Where the NPV isn't adding up but the full benefits are obvious – this is worth the effort.
Instead, financial services organisations need to see simplification as the vehicle to get to a faster, leaner, more agile and more customer-centric future, supporting new business models to deliver long-term, sustainable and profitable growth. That will be the only way to thrive in tomorrow's uncertain environment.
We believe that the best way to make sure that simplification is given heavy weighting is by ensuring that simplification is an inherent enabler to the core strategy – embedded and driven from the top down and shared across all divisions, functions and markets. With clarity of objectives underpinned by a strategic decision to simplify, the question of how to quantify all the simplification benefits becomes less sensitive.