Point of View

Advancing operating models in banking & capital markets industries

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As the regulatory overhang in the banking and capital markets industries starts to clear, firms are now seeking additional viable long-term cost and capital structures. Longstanding business processes are being called into question in order to cut expenses so firms can invest more in growth initiatives. Additionally, new operating structures are increasingly sought to improve operations’ effectiveness. This analysis of survey data provides actionable insights.

For several years, banking and capital market firms have been trapped in an operational conundrum. Initially, this was due to the challenging business environment resulting from the global recession. More recently, new and more restrictive regulations have forced firms to invest heavily in compliance and operations, often at the expense of revenue-generating activities. The negative effect on the top line has been compounded by instances in which firms have either been mandated to or voluntarily abandoned businesses as an outcome of the new regulatory regime. The result is immense margin pressure that is forcing many senior executives to think more creatively about their business and operating models for the future.

As firms now begin progressing from tactical solutions to transformational ones, business leaders won’t restrict their analysis to functions directly affected by regulations or otherwise considered non-core operations. Indeed, the pressure to reduce headcounts and costs may cause many firms to reconsider entirely their definition of core and non-core processes as they begin the necessary migration to a more variable cost structure. The logical progression of process standardization followed by consolidation through advanced operating models will enable firms to more easily implement new processes and technologies to better connect with customers, apply advanced analytics, and gain the flexibility to scale operations based on business demands.

To better understand these trends, Everest Group and the Shared Services & Outsourcing Network (SSON) conducted the first survey1 focused on industry strategies in shared services and outsourcing. The results provide a comparison of responses across three groups: banking and capital markets companies, all respondents across industries, and self-reported “mature organizations,” which are represented by larger, more centralized companies.

Process standardization followed by consolidation through advanced operating models will enable firms to more easily implement new processes and technologies to better connect with customers, apply advanced analytics, and gain the flexibility to scale operations based on business demands.

Standardize, consolidate, implement

Broadly, the results indicate that most industries, including the banking and capital markets sectors, are focusing primarily on three areas (optimizing processes) through reengineering and standardizing, increasing consolidation and centralization, and implementing new technologies.

Process-centric levers
When asked to prioritize actions for optimizing service delivery, “reengineering and standardization of processes” came into focus across industries with 78% of all respondents indicating it was one of their top three priorities. 

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Financial services firms matched that number. Only the most mature respondents showed the start of a gradual shift to other focus areas; however, two thirds of those respondents still indicate it was a top priority. Standardization is clearly on the minds of most operating leaders regardless of industry or organizational maturity. Other process-centric levers such as “increase in consolidation and centralization” were also emphasized by executives across industries, but it stood out as a top priority for 70% of banking and capital markets respondents. Certainly, new regulations stemming from Dodd-Frank, such as the Volker rule limiting proprietary trading, have forced firms to fast-track consolidation efforts for the business model, but the drive for consolidated operations may also be a result of a desire to better leverage new technology.

New technologies and better analytics
Several new technologies have been thrust upon the industry recently as either the result of new regulatory requirements or, in many cases, changing customer preferences, such as the move to multichannel retail banking. In many cases, the lack of standardized and consolidated operations makes implementing new technologies too cumbersome. However, as the survey indicates, “implementation of new tools and technologies” is a top three priority for roughly half of all respondents, regardless of industry. Technology serves as a major disruptor across industries, and the desire to implement new tools is often a catalyst for transformation; however, it is clear from the results that process improvement and technology most often go hand-in-hand, with the former enabling the latter.

Use of “analytics and business intelligence” stood out as a next-tier priority across all industries; 30% of banking and capital markets respondents marked it a top priority.

The use of “analytics and business intelligence” stood out as a next-tier priority across all industries; 30% of banking and capital markets respondents marked it a top priority. This is not difficult to understand as the possibilities within the industry are promising, but the challenge remains in the dearth of available talent. With a nearly universal focus on big data and analytics across all industries, commercial and retail lenders, especially those operating at the regional level, are having difficulty acquiring and retaining talent. This leaves the question open as to whether enough technology and analytics talent will be available once financial services firms have standardized and consolidated their processes. The solution may be that firms look to a more comprehensive shared services environment in order to have greater access to the talent required.

Increasing global delivery
More than a quarter of the banking and capital markets respondents indicated the need to “increase offshoring/nearshoring” was one of their top three priorities.

This was in line with what larger, more centralized mature companies across industries indicated (25%), and marginally ahead of the overall number (19%) across all respondents. Given the cost concerns over more stringent regulations, continued low interest rates, and the need for better technologies and talent, there can be little doubt that more mature offshoring is appealing as a cost-cutting initiative. However, with other process- and technology-focused initiatives appearing more frequently, it can be inferred that the industry is looking at a more holistic solution beyond simple cost-cutting and labor arbitrage.

Increasing scope through advanced operating model
Historically, much of the adoption of comprehensive shared services and outsourcing models has been in traditional “horizontal” functions such as finance and accounting, human resources, and IT. 

This should come as no surprise to the banking and capital markets industries, as survey results indicate an average of 3.3 horizontal functions per firm are currently in an outsourced or shared services environment. However, as shown in Figure 3, across industries, the inclusion of industry specific (vertical) functions has significantly lagged behind horizontal functions. The pressure on firms to move to a more variable cost model may in fact be a catalyst for greater focus on moving vertical functions to a shared services environment going forward.

Although the banking and capital markets survey results indicate a slightly greater tendency to include more industry-specific functions than average, respondents reported a desire for better operating models. When asked specifically which industry-specific functions were most frequently in focus, banking respondents highlighted transaction processing as well as loan, mortgage, and cards servicing. On the capital markets side, application processing, account servicing, and other operations such as order management were most often listed by respondents. Figure 4 shows which optimization activities were reported as priorities for the commonly reported industry-specific functions. 

Conclusion: The path forward

Shared services and outsourcing have been adopted by the banking and capital markets industries across horizontal and industry-specific functions; but benefits can still be derived through the transition to more industrialized operations. The migration toward truly transformational operating solutions will continue to be motivated not only by cost but also by a desire for more scalable growth brought by standardized and consolidated industry-specific functions and the technology implementation they enable. Contact Genpact’s specialists to learn about how to advance the operating model for delivering your business processes.

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  1. The survey included 650 executives across enterprises, service providers and industry influencers. It covered 28 vertical industries and eight horizontal and 164 vertical functions.
  2. Operating models - Shared services, outsourcing, or Global Business Services