Transforming The Back Office – Delivering Value Through Capital Markets Transformation

An over-riding focus for the last decade for capital markets organisations has been a relentless appetite for efficiency. As the shape of the industry has changed, so have business models as rationalisation and regionalisation have been adopted as levers to drive sustainable returns. Management attention is quickly drawn to the cost reduction impact of these decisions, with direct costs being removed relatively easily – usually people and systems that are allocated to a business and/or region. Sadly, efforts to unlock further value through cost reduction and efficiency typically then become bogged down as the organisation tries to grapple with more complex costs – those that are shared across multiple areas. Many organisations adopt a TCO (total cost of ownership) across the enterprise to focus attention upon the consolidated opportunity – ‘the size of the prize’ – but then lack the tools or mandate to execute effectively upon it. As a result, the residual cost left behind quickly becomes seen as too complex to unlock without undergoing radical transformation – which few organisations have the budget or timeframe to contemplate.

On a recent engagement for one of our clients, we undertook an assessment with a research partner to shape the opportunity for managed service offerings within certain post-trade processes. Amongst some of the more interesting findings was that for the industry across these middle and back office processes, only 40% of the TCO was deemed addressable – the residual 60% had fallen into the fixed cost line which was effectively shared across the organisation. Though initially a startling number, the reality of shared infrastructure (such as data centres), regulatory cost burden and dual or triple hatting by management layers makes this understandable.

So how can organisations look to solve this challenge and be impactful around cost ?

Shared cost means shared ownership – fragmentation around functional owners of the TCO often leads to decision makers seeing it as being someone else’s problem. Change this dynamic by giving joint ownership of the problem to the owners of the cost – and a mandate to think differently about the solution. Increasingly, we see successful organisations giving joint mandates to IT and process owners – such as operations – to collectively solve the problem. And holding them jointly accountable for the outcome.

There is no silver bullet – rarely can the challenge be resolved in hit. Stranded cost is complex and challenging to solve, so practicality is needed to support success. Organise the problem in a way that enables it to be broken down and targeted in bite size chunks. This could be by targeting processes that have common infrastructure or geography – product reference data or OTC confirmations – as an example.

Think ‘as a service’ – the challenge for post trade utilities has been that clients have forced their customised business processes upon them, restricting the standardisation opportunities. This theme needs to be flipped on it’s head, where the organisation must think around effectively ‘importing’ this standardisation into their infrastructure. Customising internal processes around this standardised service, not customising the service to fit internal standard. Only by adopting this mindset do you position the organisation to benefit from mutualisation of investment – where the vendor(s) R&D investment delivers ongoing enhancement or compliance and costs are shared across it’s user base.

Visualise the future – simply viewing success through the lens of cost reduction is too basic a perspective to adopt on the value of transformation. Though part of the puzzle, articulating how the business model is enhanced is a key part of the value proposition.

We recently helped one of our clients develop a future state vision for their operations strategy. Whilst capacity enablement was a major business driver for transformation, by utilising a value chain framework we were able to articulate that not only would capacity be enhanced through execution of the strategy – so would the value proposition of the function. Whilst the current state model consumed resources solely around ‘lights-on’ processing, the future enabled a much richer value proposition where resources are deployed in support of service and commercial outcomes for the business. As well as articulating the future state value, it also focussed on the levers for success – whilst a technology led transformation, HR had an integral role to play in enabling the new skills for the future state model. So whilst IT as a workstream may have been obvious, HR as a transformation partner was not.

Understand the problem – demystify the issue by taking time to truly understand the depth of the cost challenges. Efficiency opportunities quickly get lost when they fall into the ‘too hard’ bucket – where data or process transparency are inadequate to form decisions. Though time consuming in some respects, attention needs to be given to the problem by getting into the detail. Too many efficiency opportunities fail where organisations look for data to answer the problem and due to the inherent challenges for most around the data, it doesn’t exist. Going back to basics – applying process mapping, whiteboarding workshops, constructing simple analytics – helps to inform the decision. Roll your sleeves up, bring functional groups together, create shared ownership around the problem and the results can be impactful.

Speculate to accumulate – traditional cost levers have created a ‘brain-drain’ around institutional and process knowledge for many firms. With minimal end to end appreciation of business or process models, it can be hard to drive efficiency when so little is understood around the current state. Continually asking for more with less has ultimately rendered many organisations incapable of improving efficiency or driving transformation. The appetite is there but the capacity is not.

Driving meaningful value enhancement requires senior management to think about giving the means of production to do this – this doesn’t have to be a multi-million $ bill, but it does need to offer capacity to support the outcome.

We see certain capital markets firms adopting a more practical approach to impactful TCO benefits – where they are utilising some of these approaches to enable innovation or unlock cost opportunities. But they have done this by thinking differently

“The world we have created is a product of our thinking; it cannot be changed without changing our thinking” Albert Einstein


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