Financial services executives know they need to simplify their organizations 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 organizations, 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 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 organizations are anything but simple.
Nothing simple about it
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 rationalize their IT estate, modernize 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 rationalize their IT estate, modernize their capabilities, reduce costs and, at the same time, provide the capabilities to adapt and evolve their business models to secure future growth.
Go beyond efficiency
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 close to customers, improve operational resilience and control over performance, and better understand and anticipate risks. Simplified control environments and processes should help organizations 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 targeted, and waste and duplication would be eliminated. Every investment dollar would count towards the long-term health of the organization.
Five steps to simplification
- Clarify the financial organization's strategic focus (such as purpose, role, client focus, experience requirements, value, ease, innovation) and make clear choices around competitive positioning. This will drive strategic choices around the organization's architecture and operating model.
- Choose a direction for the business architecture (such as the assembly of customer journeys, distribution and operations). Many financial institutions are organized along product and channel lines, giving rise to silos, which need to be broken down. Typical considerations for business architecture include:
- customer journeys, segments and product needs
- sales and service approach (e.g. by channel vs. integrated) and incentivization (e.g. profit or cost centre)
- multi-brand management and fulfillment
- high level systems and architecture
- operations and technology, including centralized services between divisions.
- Determine which activities are strategic and provide a competitive advantage, given the organization's agreed focus in the first step. This will drive choices around which activities should be retained in-house and which could be outsourced.
- Assess the simplification options for the organization's activities in line with its strategic focus, its business architecture and the (strategic) nature of its activities. Four main options should be considered for each activity.
- CoE creation: Leverage current capabilities with potential for high performance. This is likely to be the adoption of a current Centre of Excellence (CoE) for the wider organization (e.g. migrating all secured and unsecured consumer credit assessments to the state-of-the-art mortgage credit assessment platform).
- Transformation: Transform Transform existing assets/capabilities that are not restricted by legacy issues (e.g. HR management supported by a newly implemented cloud-based ERP system).
- Development for replacement: Build a new unconstrained capability to take over activities with too many legacy issues to be transformed (e.g. full replacement of firmwide data and analytics functions by a central hub).
- Third-party solutions (including partnering/outsourcing): Consider third-party solutions for non-strategic activities that are not high performing. Decisions should be based on reduction of complexity, organizational rigidity or risk, rather than on productivity alone.
- Develop the simplification road map, taking into account various dependencies. The road map will be bespoke for every organization, given their vast differences in starting position, strategic activities and simplification options. In order for the change to be delivered, the following must be aligned across the business — clear roles and responsibilities and sponsorship to drive and ensure ruthless execution.
Making the case
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 prioritization is inherently valuable to the organization 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 organizations 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 recognize 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.
Take it from the top
Simplification should never be the primary objective in and of itself. When simplification is the only objective, investments in improvements and innovation will get penalized. 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 organizations 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.
Other articles in Frontiers in Finance - October 2019
- Frontiers in Finance - October 2019
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- Paytm: Solving problems to create opportunity
- What ails European banks?
- Accelerating transformation: Beyond signing the deal
- Voices on 2030: The Future of Financial Services
- Agility with discipline: Transforming MUFG's Transaction Banking business
- Financial services CEO Outlook 2019
- Connect to compete: Delivering the next-gen target operating model
- Does banking's future outweigh its past?
- Spotlight: Goldman Sachs breaking new ground with Marcus
- Flexibility for growth: Operational excellence in an era of digital disruption
- Next-generation banking technology and tax implications
- Global Tax Benchmarking in Financial services
- AI offers the smartest solution for transition to RFRs
- Tax, transfer pricing and transformation: What Asset Managers may be forgetting
- When opportunity comes calling: Using the deferral of IFRS 17