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  • 1. Feature Be Global and Act Local: Performance Management Solutions Ensure Success in Cross-Border Operations TowerGroup Take-Aways • Consolidation is globally vigorous as banks seek growth beyond their domestic market. • Cross-border retail banking faces new regulators, codes of law, cultural differences and banking norms. • Invariably large banks with the discipline to span cultures and time zones, attempt cross-border retail banking opportunities. • Performance management solutions provide compelling benefits in cross-border operations and customer management. • Performance management solutions offer several business models for cross-border retail banking. Report Coverage Consolidation is globally ubiquitous, as banks seek growth opportunities beyond their domestic market. This quest involves high-stakes. Servicing new and distant customer franchise is challenging, as is balancing the relationship between local autonomy in decision making and centralized head office management. Not every cross-border expansion is successful. Retail banks are adopting performance management solutions (sometimes referred to as corporate performance management, or CPM), as the realities of managing across borders demands informed decision-making. These solutions provide banks with access to valuable operational data in near real time. This TowerGroup Research Note investigates the growing trend in cross border banking acquisitions and delves into the performance management solutions that enable successful operations. For more information on performance management solutions in banking, refer to the following TowerGroup Research Notes: • V49:18BP, Innovation: Financial Services in a Brave New World • V47:21B, Data Governance: Banks Bid for Organic Growth • V46:20R, Measuring for Success: Corporate Performance Management (CPM) Vendors in the Banking Industry • V45:24RW, Corporate Performance Management (CPM): Key Trends in the Banking Industry Retail Banking Goes Cross-Border: Standard Chartered, ABN AMRO, Citigroup, and HSBC have followed a cross-border strategy for years. What is noteworthy is the increasing numbers, varieties and geographical regions of deals pursued. Since 2004, banking markets in the United States, Europe, Latin America, Eastern Europe, and Asia- Pacific have undergone banking consolidation of non-domestic banks. In the US market, banks such as the Royal Bank of Scotland (RBS) have used their existing US-based subsidiaries (Citizens) to consolidate purchases. In Europe, scores of large foreign banks have been acquiring small, medium- sized, and large institutions as bankers seek to establish beachheads in new markets. In China, because of regulatory restrictions, the pacts between domestic banks and foreign financial services institutions (FSIs) were restricted to acquiring minority stakes in the local institutions. Challenges in Cross-Border Operations Some of these challenges include: • Determining the right business model for operations. • Determining the product set and technology infrastructure. • Recognizing the differences in local norms. • While working through the data integration issues, banks must consider customer relationships that move beyond the traditional domestic market of the institution. • Determining how customer decision can be improved. • Providing consolidated compliance reporting to a new set of stakeholders / regulators. In addition, banks that acquire customer franchise outside their home markets must address the challenges associated with enterprise risk management.
  • 2. The US Banking Market In recent years, US domestic banks have been targets for takeover by aggressive foreign institutions. Exhibit 1
  • 3. European Banking Markets The European and Eastern European banking markets have been markedly active in mergers and acquisitions in recent years. This can be attributed to the growth and maturity of economies and banking systems in nations formerly associated with Soviet Union and the accession of 10 new nations into the European Union in May 2005. It is also due to the continuing efforts to harmonize cross- border banking under the European Union’s Financial Services Action Plan. Exhibit 2 provides banking transactions completed in Europe recently. A notable pact shown is the yet to be finalized the purchase of ABN AMRO. Observers expect a deal in the third quarter of 2007. The ABN AMRO negotiations are remarkable because of the sheer breadth of the retail banking franchise extending to 53 countries. Effectively managing this geographically dispersed franchise will be a challenge. Chinese Banking Market The Chinese banking market offers the greatest risk and potential for profit. Exhibit 3 features an overview. Although not all of the transactions listed are consumer banking oriented, the roll call of acquiring institutions includes some of the largest and most astute consumer banks in the world. Over the next few years, as the banking industry continues to evolve additional acquisitions are anticipated. December 2006, when China marked the five-year anniversary of its entry into the World Trade Organization, was also the deadline for opening the domestic market to foreign banks. To summarize the trends exhibited in the US, European, and Chinese banking markets, large banks are moving beyond their domestic environment in the quest of growth opportunities. Larger banks have the confidence to make these moves and exploit their existing operations and infrastructure across regions and time zones. The types of deals these banks strike are diverse, but managing banking operations across regions is inherently risky. Banks that take on distributed franchises can mitigate risk by using performance management solutions. The Evolution of Performance Management Solutions Performance management, or corporate performance management (CPM), are the integration of financial management, data management, and business intelligence with value- added software capabilities such as workflow tracking and dashboards for enhanced reporting. They facilitate improved decision-making and operational transparency, which provides the linkage between strategic initiatives and daily activities. The integral modules of a performance management solution commonly include: • Budgeting, planning, and forecasting (financial management) • Financial data consolidation and management (data management) • Real-time analytics and information reporting (business intelligence) The resulting performance management solutions provide access to critical information with varying levels of granularity and summarization, depending on one’s role in the bank. They also provide solutions in a real-time window of current performance, with the ability to compare strategy, forecasts, goals, and plan with actual operational results. The resulting solution is designed to be pervasive, providing measurement and management oversight and provides information sharing throughout the bank’s hierarchy. Exhibit 4 is a schematic view of how critical performance data can be shared in an organization based on the roles and responsibilities of employees. Although performance management solutions are a result of financial management applications, the ability to manipulate and consolidate financial and operational data is an equally integral aspect. As noted in the exhibit, providing accessible data to managers across a financial institution is the
  • 4. foundation of performance management. A single version of the truth that can be shared across myriad functions and business lines is instrumental in its efficiency and effectiveness. Finally, the ability to report information in pre-configured. Role-based dashboards using appropriate key performance indicators (KPIs) is a crucial component in these solutions. Performance Management in Cross-Border Operations Managing a customer franchise from a distance, especially when unfamiliar national laws and regulators are involved, is a challenge. As banks cross borders, their need to quickly and accurately consolidate financial data becomes paramount. Banks need to examine their most effective business model, determine the degree of centralization and autonomy for local managers, while they ensure information flow to the head office. Given the heritage of performance management (strong roots in planning, budgeting, and forecasting), financial information and performance are the keys to the way banks view performance management solutions.
  • 5. Exhibit 5 provides an overview of banks’ most common use of performance management in cross border environments today. Banks must move beyond the financial perspective and examine other uses including process alignment, operational efficiency, optimizing operations customer-facing processes and decision, and to ensure that daily operations are in synchrony with strategic goals of the organization. Operations Management Regardless of the degree of autonomy of its non-domestic business units, efficiency and effectiveness of daily operations will be critical. Ensuring proper linkage of daily operations and processes with corporate strategy is possible with specific information feedback loops and reporting capabilities. This reporting / visibility into local operations has to be in near real time. The opportunities in operations management revolve around the recurring processes of the back office, the channel management concerns of the middle office, and the customer-facing sales activities of the front office. Finally, banks concerned with organic as well as the leapfrog growth, associated with mergers and acquisitions, will actively monitor sales activities in call centers and branches: to ascertain the conversion ratios associated with cross-selling activities. Customer Decisioning Customer decisioning is perhaps the most “outside the-box” opportunity for performance management solutions to add value to banks engaging in cross-border retail banking. Such banks find regulations
  • 6. and norms for customer decisioning vary from one region to another and they must modify their decisioning processes. Although determinations to extend credit are the most obvious exemplars of customer decisioning, other customer queries posed daily to retail bankers include the granting of fee waivers and decisions on the appropriateness of opening new accounts for prospects. All three decision processes are freighted with consequences for the bank, so bankers on the ground and in the head office will benefit from improved reporting on process efficacy in real time. These include an auditable transaction history for regulators, a performance history for credit scoring, and critical employee-level execution data that can signal the need for remedial training. Processes mutate over time. Documenting, monitoring, and reporting on processes ensures elimination of procedural aberrations, monitored by local and distant managers, with proper visibility into key customer decisions. Summary Not every cross-border acquisition will succeed. As banks move outside familiar domestic markets, they are often at a disadvantage to local competitors, who have the advantage of local knowledge of their consumer banking markets and must determine the right business model for managing in newly acquired markets. The degree of autonomy granted to local operations will vary. No one set of policies is applicable for all banks. Yet performance management solutions can enable a wide variety of business models by providing critical performance data to personnel across geographic regions in near real time, which allows: informed decision making, linking of corporate strategy to daily operations, and discovery of employee or process performance. Kathleen Khirallah Managing Director, Banking Practice TowerGroup