The current slowdown in business is presenting investment banks with a real challenge. As the ‘second wave’ of cost cutting arrives, Rob Heyvaert, of solutions provider Capco, explains to Parveen Bansal his company’s formula for improving efficiency.
With the latest slowdown affecting the business and operations of investment banks, Rob Heyvaert, founder chairman and CEO of services and technology solutions provider Capco, knows only too well that change is a constant, and success not so easy. However, he suggests that investment banks are already on the path to improving efficiency, and now need only to learn how to consider using new organisational models in addition to utilising existing business models and technology more coherently.
Business is dry – there are few if any initial public offerings, merger and acquisition activity is slow and other areas are also hurting. According to Mr Heyvaert, a single business question turns the wheels of change, and that is: Where are margins going to come from? “With so many investment banks already having cut headcount, there is the need to explore new fronts that will enable companies to drive down costs. The aim for many is to achieve improved operational performance and productivity,” he says.
STP and staff reductions
In recent years this has culminated in efforts to achieve straight-through processing (STP), mainly by increasing the level of back-office automation in order to reduce staff. Other industry initiatives, such as continuous linked settlement in the cash market, and trading and confirmation matching in the derivatives market, have also driven moves towards increased automation.
But full STP remains a challenge, and step changes in operational efficiency seem elusive. Key barriers to improved operations, says Mr Heyvaert, are the highly manual environments that have high levels of exceptions processing, functions that are duplicated across regions, and products and business support that is provided in silos.
Despite this, he is optimistic about the future. “We are observing managers beginning to focus on the second wave of cost cutting and asking ‘is this the way to do business?’” The second wave, he says, offers organisations the opportunity to transform business processes at the same time as cutting costs. Capco describes it as focusing on the three Cs: cost cutting, customer service improvements and the improved business and operational controls.
“Chief executives, chief finance officers and chief information officers (CIOs) are becoming more tech-savvy and are more aware of the need to align business and technology decisions, to lower cost and improve business controls,” Mr Heyvaert says. Since the arrival of STP, managers are more aware of the importance of back-office operations as well as front-office applications, and many are questioning existing business systems and architectures.
Rationalisation
The need to collect inconsistent data that is held in disparate systems in order to improve customer services has highlighted the requirement to rationalise systems and align business and technology architectures. As a result, technical architects are becoming both more valued and more involved in the business decision-making process. “Skills at the top are changing,” notes Mr Heyvaert.
With banks relying on costly legacy systems, managers are under immense pressure to reduce the cost of technology and maintenance. “Today managers are more open to new technologies, such as open-source platforms like Linux, and layer technologies, such as web services, which offer the opportunity to significantly reduce total cost of ownership and improve flexibility,” says Mr Heyvaert. He cites work-flow technologies and improved messaging as examples of solutions to handle more effectively exceptions processing, which makes up a major part of operations costs.
He identifies some key activities that signal business transformation and improved operational efficiency in the investment banking industry. The first is the trend in business process outsourcing and offshoring (setting up operations in low-cost locations), which is enjoying strong and continued growth.
Cost equation
“The cost equation is so compelling that few can ignore it,” he says, adding that this trend will continue unless there is legislative intervention. Some, he says, may be concerned in light of the operational risk implications of outsourcing to a politically risky country. “However, investment banks are simply building on their global footprint to reduce risk by locating in various low-cost locations.”
He warns that the difficulty of migrating operations to the remote locations should not to be underestimated. There needs to be a shift in thinking of offshoring as a pillar, rather than an appendage, of corporate strategy. One issue that must be addressed is the need for consistent connectivity within the organisation and between its locations. “Investment banking has several applications for different business areas and operations are often isolated,” he says. Clearer business architectures and aligned technology architecture are central to enabling connectivity with remote locations. New generation stock exchanges and virtual matching utilities are also demanding connectivity, he says.
Outsourcing of IT infrastructure and support services is fast becoming the norm, with many investment banks reconsidering their core competences. Utility-based computing will probably increase as organisations can no longer afford huge infrastructure investment. “Agreements such as those between ABN Amro and EDS, and JP Morgan and IBM are just the first step toward on-demand and utility-based computing,” says Mr Heyvaert.
“Managers seem to have overcome the psychological block about giving up ownership of operational pipes and are increasingly willing to consider shared sourcing internally and outsourcing externally. The services offered by State Street and Bank of New York for global custody, securities clearance and settlement, mutual fund accounting, etc, offer a good example of the openness to shared sourcing,” he adds.
Sophisticated service contracts
“Financial institutions are preparing themselves to be able to source any applications from any part of the world,” says Mr Heyvaert. “We are seeing a high level of sophistication in the service contracts, and organisations are becoming smarter about what they source.” He suggests that investment banks are becoming sophisticated hubs for the buying of services. “The global nature of investment banks makes them more comfortable working with and from remote locations.”
The focus now is on how to improve value to the business and maintain sufficient controls to reduce risk. Management compensation models are also changing so that there is greater motivation to embark on long-term change projects while at the same time delivering short-term improvement in efficiency and return on investment.
Supplier requirements
Investment banks are beginning to use performance management tools such as 6-Sigma, and today’s CIOs have to have financial skills, sound business judgment and also be technically aware. By the same token, they are demanding more involvement from their suppliers.
“They are looking for suppliers who can demonstrate a clear understanding of the business architecture and are able to translate functions into technology,” says Mr Heyvaert. Shared risk business models are also becoming increasingly popular.
He concludes that the fundamental issue for investment banks is how they can migrate and transform the existing business operations and technology infrastructure using well-established and well-proven methods, as well as challenging the norm with new paradigms as needed.
