In the year since the last World Economic Forum in Davos, the global economic outlook has changed profoundly. The subprime crisis, housing market slump, credit disruptions, failure of some of the world’s largest banks, and consolidation and government bail-outs of others, have changed the face of world economies for months, if not years, to come. And the progress of globalisation since the last economic downturn means these events are having a wider impact than many have seen before.
A consolidated industry
The main implications of the bleak economic climate for the banking industry flow from the industry consolidation that has resulted from the threat of failure of major financial institutions. Consolidation means the emergence of a smaller number of key players in the industry. Institutions that have fallen foul of the downturn have removed some of the competition in the marketplace but simultaneously forced those that are left to find ways to survive in order to stay ahead.
The net effect is that uncertain times lie ahead, that much is agreed. However, what is often overlooked is that these are times of opportunity as well as challenge. Most notably, unlike the last major downturn in 2001, information technology is now perceived as a solution to the problem and integral to business success. For banks, this translates as a chance to retain – and even gain – market share through the use of technology, which can improve customer satisfaction as well as competitiveness.
All of this signals a return to core competency – a phrase you will hear time and again in the coming months, and for good reason. As market conditions toughen, we have seen a great many financial institutions returning to their core competencies to ensure their competitiveness.
Banks such as UBS are key indicators of this trend: it pruned its commodities division down to its core and announced it would focus on its original area of expertise, wealth management. Consolidation has also prompted innovation in deal structures between banks and their technology providers. For example, the Tata Consultancy Services (TCS) acquisition of Citigroup Global Services (CGS) in October 2008 represents one of the new business partnership models now emerging that are increasing competitiveness and mitigating risk for global financial institutions.
Disappearing captives
In the current climate, it does not make sense for Wall Street firms to run their own ‘captive’ back-office information technology operations that perform functions such as order processing. Captives will disappear since they are one of the big-ticket items that will give banks the savings they want.
As banks look to shrink and cut costs, they could save 20% to 30% on technology systems. And in deals such as the Citi-TCS partnership, core competency is key: the bank concentrates on banking, and the technology partner concentrates on technology. It appears to be a simple formula, and it is. As true innovators will tell you, it is often the simplest ideas that work best.
When the global financial panic reached fever pitch late in the summer last year, a ‘merge or die’ mentality became prevalent in the financial services industry. Early on, JPMorgan swallowed up Bear Stearns, followed by others – such as Bank of America acquiring Merrill Lynch and Lloyds TSB buying HBOS – in dramatic steps calculated to head off the challenge of the financial crisis. The role of technology in ensuring that these mergers and acquisitions (M&As) succeed is key. Disparate systems, applications and platforms need to be integrated, and to a tight schedule.
There also needs to be an intimate understanding of the similarities and differences between the way in which the two previously separate institutions use these technology tools. There is an opportunity to cherry-pick the best elements of both banks’ systems and integrate them into ‘super-platforms’ that will be scalable, flexible and more resilient than ever before – but only if technology is recognised as the true enabler of successful M&As.
In fact, according to independent research commissioned by TCS, in contrast to the downturn of 2001, IT has become an integral part of every enterprise – not least in the financial sector – and its deployment is perceived as being closely linked to business success. In fact, 88% of IT managers in the US and UK stated that the role of IT has changed since 2001, and nearly 60% see continued IT spend as essential because IT is now part of the fabric of the company. In no sector is this more true than finance, and as technology is now one of the cornerstones of modern banking, it needs to be robust and reliable.
Close partnerships
Furthermore, 69% of those surveyed said they want to use IT to improve customer satisfaction, and 58% want to use IT to improve competitiveness. All this points to the fact that banks need to work in close partnership with their technology providers in order to design, implement and maintain systems and processes that are tailor-made and meet their business needs.
Technology should not be seen as a discrete investment but one that is part of the very fabric of a bank and integral to its success. Technology partners that delve deep into their customers’ businesses to understand their culture, as well as their technology needs, will help banks to derive the best value and most stability from their IT projects.
In this shaky economic climate, global corporations need to innovate their products, services, business models and operations to address the changing business needs and prepare for the future.
The only way to do this is by harnessing the power and knowledge of technology. In fact, stability and reliability need not come about at the detriment of innovation: it does not have to come in a ‘big bang’ form. Innovation can be defined as ‘an idea that makes a material difference to an organisation’s current capabilities or creates a future capability’.
In tough market conditions, innovation can help banks pull ahead of the competition and mark themselves out as leaders rather than followers. And innovation can come in the most unexpected forms. The Citigroup Global Services deal took a creative approach to the challenge of consolidation and return to core competency, and I predict we will see more deals of this kind that integrate partner capabilities and partner IT infrastructure to deliver joint value to joint customers. Such product innovation requires a high degree of agility and openness in core IT systems.
Shift of power
A more obvious arena and opportunity for innovation lies in the shifting of power to the consumer. The events in the financial sector over the past year or so are being felt with force in the wider global economy and, as a result, many consumers are feeling powerless when it comes to their finances.
Banks need to increase their focus on customer convenience and overall experience in order to win back their trust. Technology innovation can help them do this by developing a wider range of choice, convenience, and security in products, features and access. Mobile banking, for example, will give customers that ‘any time, anywhere’ access to their accounts that will make them feel, and be, more in control of their money.
All this highlights the fact that, far from prompting conservatism, the current economic crisis has triggered an innovation drive in the financial sector. As the 2008 Business Week-Boston Consulting Group ranking of the World’s Most Innovative Companies demonstrated, investors believe in companies doubling their bets on projects that will position them best in the current economic situation.
So while the global economy has changed beyond recognition, now is the time to invest in partnerships and innovation to keep pace with, and stay ahead of, that change. The economic downturn has altered return on investment: there is potentially so much more to gain than ever before. This is the silver lining to the dark clouds of the financial crisis, but only if we grab the opportunity with both hands.
S Ramadorai is chief executive officer of Tata Consultancy Services.
