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  1. 1. ThePoint An Outlook Financial Services Publication Industrializing IT Creating a more efficient IT model for investment banks
  2. 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 demanded flexibility 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. 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 technology efficiently. 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 command-and-control, product-centric 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. 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. 5. An Alternate IT Services Business Model Governance Framework Management IT Services Services Information Alliance Technology Initial Assets Investment Partner Fee Services Bank Fee Company Technology Solutions Fee Requirements Services Technical Corporate Offshore Services Technology Provider Solutions Audit Legal 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 offshore resources. • 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. 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 five steps: 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 services company. 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. 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 lower-cost structure. 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. 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 leadership team. For a more detailed report on this issue and information on many other financial services subjects and initiatives, please visit our website at Fergus Reid Editorial Director Financial Services Marketing Communications email: Design and Production Alexander Isley Inc. • Consulting • Technology • Outsourcing • Alliances Copyright © 2002 Accenture. All rights reserved. Accenture, its logo and Accenture Innovation Delivered are trademarks of Accenture.