It's no surprise that regulation and compliance is listed as the number one challenge for financial firms in many surveys, but a recent study shows organizations that have increased flexibility and responsiveness in their operating model are pulling away from the pack when it comes to competitiveness and customer response.
A recent study from IBM and Broadridge Financial Solutions shows how forward-thinking firms are breaking away from the industry's long-held “not invented here” approach to managing operations to create a more open, agile and customer-focused model that expands the traditional boundaries of collaboration with external partners. In fact as firms increase their focus on operational efficiency and agility, the possibility of an industry-led utility for processing or other common "back office" operations may become a reality.
Although there have been discussions about industry utilities for decades, little has been done to actually start a true industry-led utility for some back-office operations. However, the dramatic retrenchment in the capital markets, cost and regulatory pressures, and the maturation of technology may turn the talk into a reality.
"People know that at the end of the day, scale wins," Charlie Marchesani, corporate vice president, Securities Processing Solutions, at Broadridge Financial, referring to the belief that large scale back-office processing capabilities perform more cost effectively than smaller operations. "But an industry utility is an elusive topic. There are some companies that are thinking about contributing their assets to a utility, but I don't have a good crystal ball about this. The idea of an industry utility has come up before. But the talks are more advanced today, the technology is better and the idea resonates more than ever before."
[For more on how technology's role is changing in financial services, read Technology's Growing Importance to Business Provides an Opportunity .]
Even if an industry utility doesn't become a reality in the near term, respondents to the survey realize that the operational side of the business is becoming more important. In fact, some industry analysts have asserted that operational scale is becoming more important than financial leverage and trading expertise. The study's findings corroborate this view. Among the respondents, leaders are more than twice as likely as laggards to be adapting their operating models to provide greater scalability.
"Based on regulatory, competitive and margin pressures facing financial services firms today, current operational systems are challenged to deliver the needed scale and cost efficiencies," Marchesani says. "Increasingly, financial firms are looking externally to adopt more flexible and scalable operating models to quickly respond to new growth opportunities and the continuous regulatory changes."
Leaders are more likely to look externally than laggards as well. "One of the trends we are seeing is larger firms are looking outside their organization, rather than build it themselves," Marchesani says. Compared to peers, leaders are more inclined to build collaborative operating models that leverage partners' expertise, technology, scale and continuing investments, says the report from IBM/Broadridge.
Forward-thinking companies recognize that an internal solution is not the only way to create greater agility and best-of-breed operational capabilities. Collaborative sourcing approaches can take many forms -- from traditional outsourcing to cloud solutions to mutualized processes shared across the entire industry. The rationale is not just about cutting costs -- it's about increasing competitiveness and freeing up capital and management attention from areas where firms lack competitive advantage, allowing firms to refocus resources on differentiating areas, according to the report. In the survey of 133 senior business executives and top IT decision makers from both large and small firms located in the world's trading centers, including the United States, United Kingdom, Singapore and Hong Kong, 77 percent cite regulatory requirements and 59 percent point to more demanding customers as the top external market drivers triggering changes in their operating models. Only 22 percent of firms currently excel at both.
The findings from the IBM/Broadridge study show that new ideas and methods for running the capital markets business are being considered and put into practice at many firms. "Regulation and efficiency improvements have always been a concern for securities firms, but the increasing demands and sophistication of today's financial services clients require firms to continually innovate -- not just in the products they offer, but also in how they adapt and run their businesses," says Ron Lefferts, Financial Markets Industry Leader for IBM Global Business Services in a press release. "Leading firms have looked at their own ecosystems and are embracing new operating models as part of their organizational DNA to get closer to their clients and create a differentiated experience."
The study grouped respondents into three categories: leaders, followers and laggards. Leaders excel at meeting both regulatory and marketplace requirements, typically introducing new products and services in three months or less. Approximately 20 percent of firms fall into the "leaders" group. Followers, which accounted for half of the survey respondents, tend to master one priority or the other, compliance or innovation. Laggards struggle with adapting their operations to new regulations, and it takes longer for them to support new products and services. Nearly 25 percent of survey participants fall into the laggard category.
According to the study, leaders are more attuned to external, market-oriented priorities, while Laggards focus on internal challenges like reducing costs. For instance, 54 percent of leaders are focused on offering differentiating from competitors, while only 25 percent of laggards are focused on the same goal. Meanwhile, only 17 percent of leaders consider reducing operating costs a top 2012 business priority, while 38 percent of laggards are focused on it.
"Regulatory pressure is the top of mind and that was no surprise," IBM's Lefferts says. "The difference between external focus versus internal focus was the most eye opening. Firms are looking at how the entire organization is run and how it can be a competitive differentiator in the marketplace."
Broadridge's Marchesani also sees firms looking at operations and technology in a different light. "I would say there was more of a maturation of ops and technology and how it services the client," he says. "The emphasis was not on scale and cost, but it was on how operations can help the firm win in the marketplace."
According to the research, leaders (92%) are more client focused and achieve high customer satisfaction when compared to laggards (63%). Leaders (67%) are also more agile when compared to laggards (29%). Another key contributor to Leaders' agility is better insights. More than two-thirds of leaders indicate their operating models provide improved access to analytics, more than double the percentage of laggards who report such benefits.
Other findings include:
Customer Satisfaction: Given their intense focus on clients, Leaders are 1.5 times more likely than Laggards to report high levels of customer satisfaction and almost 3 times more likely to differentiate the customer experience.
Analytical Edge: Leaders are 2.4 times more successful than Laggards in stripping complexity out of their operations. A key contributor to Leaders' agility is better insights. More than two-thirds of Leaders say their operating models provide better access to analytics, more than double the percentage of Laggards.
Outsourcers: Leaders are more inclined to tap external partners to acquire expertise that enables faster speed to market. Leaders are more than twice as likely as Laggards to share operational risk and to outsource highly standardized back-office processes.
Some of the comments from executives in the study backup the findings. "From an operational perspective, we're bringing platforms together and building a system that can move as quickly as our clients want to move," said an operations VP with a UK-based broker-dealer. "The better/more efficient our operations are, the more customized products can be offered; this will allow us to differentiate," said a COO with an investment manager in the US.
To access the full report, visit Beating market mandates: How winners are re-engineering financial markets operations. Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio