An Outlook Financial Services Publication
Creating a more efficient IT
model for investment banks
2. Strategic IT Efficiency
In today’s economy, information technology
(IT) within investment banks looks a lot
like an underperforming asset. Technology
costs are far higher than those of other
financial services firms and, over the long
term, are predicted to grow faster than other
costs and revenues.
Investment banks represent a prime
example of the product-centric business
model. With their emphasis on speed to
market and high product margins, they have
IT transformation and responsiveness
from their IT
has become departments without
regard for cost or
an economic efficiency.
necessity. However, there are
indications that this
business model is no longer sustainable.
Product margins have narrowed over the past
decade, and volume growth is no longer
sustaining earnings. Trading volume growth
has highlighted the fragility of the underlying
processing infrastructure, and overall industry
efficiency is an increasing concern.
IT transformation has become an economic
necessity for investment banks, but
fundamental cultural barriers to achieving it
remain within the current organizational
framework. A new IT business model is
required that combines internal capabilities
with a strong alliance partner to establish an
external, efficient, world-class IT organization.
Robert P. Gach
Accenture Managing Partner, Capital Markets
William M. Andrews
Accenture Associate Partner, Capital Markets
3. Investment banks spend twice as much on
information technology (IT) as their
commercial and retail counterparts on a
revenue percentage basis. The perception is
that the higher IT costs result from the
information-intensive and technology-
dependent nature of the industry. The reality
is global investment banks do not manage
The underlying drivers of such inefficiency
are as complex as they are fundamental to
the culture of investment banking, making
them extremely change resistant. The
industry operates on wide profit margins
where speed to market and flexibility are
more important than operating efficiency. It
is not only IT that suffers in this environment,
but also front- and back-office processing.
Manual interventions still proliferate and too
many operational processes remain designed
around the movement of paper securities.
With investment banks managed by
executives, technology decisions are
invariably optimized to an individual product
organization’s needs. More efficient and cost-
effective, cross-product IT initiatives seldom
obtain the required political support to
sustain executive commitment. Further,
investment banks are highly leveraged and
capital-constrained, making them reluctant
to invest in non-revenue-generating areas
like new, large-scale IT initiatives.
The hurdles ahead
Dark clouds are on the horizon. Although
investment banking profits have been
shielded by the 1990s’ bull market, firms’
profit margins have steadily eroded over the
last decade, particularly in “plain vanilla”
4. securities. New competitors exploiting new,
lower-cost technologies have created pricing
pressures, and clients are more demanding.
Regulatory, efficiency and capacity pressures
are driving the industry to increase
automation and achieve “straight-through
processing” capabilities. The downturn in
global markets and forecasts of slower
growth ahead are creating earnings pressures
and the need to seek new approaches to
improve profitability and reduce costs.
If current trends continue, things will get
worse rather than better. Nobody expects
investment banks’ product margins to
improve, even as the business cycle improves.
Technology, however, continues to advance
throughout the business. But with little
displacement of older technology, it is
inevitable that IT costs will continue to
increase at a faster rate than other costs.
This presents an opportunity. For example,
if a major investment bank was able to
rationalize technology silos, improve
efficiencies and reduce costs, it could achieve
a sustainable competitive advantage.
Building the new model
Accenture believes the technology challenge
facing global investment banks cannot be
surmounted within the framework of the
current IT business model. A fundamentally
new IT model is required comprising a fully
external, world-class IT entity with a new
governance structure linking the business
to the external IT organization.
The three components of the IT business
model are the external IT entity, a new
governance structure and a strategic alliance
partner. This does not mean taking a
traditional outsourcing approach to the
5. An Alternate IT Services Business Model
Management IT Services
Alliance Technology Initial Assets Investment
Partner Fee Services Bank
Source: Accenture Tax
problem. In fact, the importance of IT
demands a very different tack—a strategic
co-sourcing alliance that will fundamentally
transform IT in investment banking. The
benefits investment banks can expect from
establishing this model include:
• Immediately reduced IT costs through
the use of external financing to convert
to a more efficient IT service delivery
model that employs both onshore and
• Reduced long-term cost structure by
30%-50% through a multi-year program
to implement standardized global product
and cross-business solutions.
• Enhanced technology capabilities
and services through an industrialized,
best-practice IT organization.
• Improved technology-enabled business
capabilities as a result of implementing
simplified technology architecture,
adopting standard application solutions
and eliminating complex legacy systems.
6. • Greater flexibility as a result of the
rationalized technology architecture and
enabled by the combined capabilities of the
IT services company and alliance partner.
• Greater financial and performance
transparency as a result of the compre-
hensive financial and service metrics
produced by the IT services company.
Five steps to move forward
There is no denying that establishing an
external IT services company is a major
undertaking. The risks are numerous, and the
potential for failure significant. To avoid the
pitfalls and enjoy the competitive rewards,
success hinges on adhering to the following
1. Obtain executive commitment. As with
any strategic alliance, board-level approval
is necessary. The support of the CEO and a
majority of senior executives is essential.
Obtaining this commitment will require
convincing investment banking executives,
familiar with a command-and-control
environment, to appreciate the benefits
over the risks.
2. Establish an alliance relationship. The
investment bank must identify an alliance
partner with the capabilities and scale to
help establish and manage the external IT
3. Create a shared vision. The primary
objective is to end up with a far more cost-
effective IT capability. All parties need a
clear understanding of the long-term vision
and the measures of success. Agreements
and financial arrangements must align
incentives with overall success criteria.
7. 4. Redesign IT governance. Careful attention
must be given to obtaining the support
and commitment of business executives
and involving them in the redesign and
implementation of new governance
processes. This may ultimately determine
success or failure of the endeavor.
5. Transform the technology. The technology
transformation program will inevitably
be a multi-year program with two primary
objectives: creating the industrialized IT
services company and rationalizing
technology platforms supporting the
business. Improving efficiency and lowering
costs are clearly the priorities, not only to
reduce the costs to the investment bank,
but also to fund technology rationalization
initiatives. The technology rationalization
program is the key to achieving the
majority of the savings and the sustainable
Given the choice, most executives would
prefer a path of incremental change rather
than change on the scale outlined here.
But the investment banking industry is
facing some major obstacles that call for bold
and dramatic action. The combination of
declining margins and profitability, forecasts
of slower growth rates, increasing product
and processing complexity, and increasing
technology costs all contribute to the need
for radical change.
The question is whether to move forward with
incremental cost-reduction and conventional
outsourcing initiatives or seek a more
innovative, transformational approach. How
that question is answered may result in billions
of dollars of bottom-line cost savings and
years of sustainable competitive advantage.
8. The Point
Volume 2, Number 6
The Point is a monthly thought
publication based on studies, research
and/or analysis by Accenture’s global
Financial Services group and thought
For a more detailed report on this
issue and information on many
other ﬁnancial services subjects and
initiatives, please visit our website
Financial Services Marketing Communications
Design and Production
Alexander Isley Inc.
Copyright © 2002 Accenture.
All rights reserved.
Accenture, its logo and
Accenture Innovation Delivered
are trademarks of Accenture.