Power to the People
Power to the people: Building back-office efficiency
In the future, investment banks may well source their back-office processing capabilities from giant operational utilities. But current constraints suggest this is likely to be the work of decades and does not necessarily solve the problems that still bedevil and undermine back offices. In the meantime, empowering staff with the right tools can foster greater operational control, capacity and flexibility.
We live in a period of extraordinary technological innovation, but it’s still people who make innovation a reality for billions of business users and consumers around the world. For businesses, this doesn’t just mean chief executives, founders and management teams steering their firms from the bridge.
It’s equally about the people below deck who manage the supply chain, answer calls at the service centres and create workflows to handle the exceptional requests. Without these ‘back-office’ contributions, many innovative products and services would not materialise.
‘Soup to nuts’ process efficiency
This is true of any industry, even ones like investment banking, which has historically seen itself as an exception to most rules. Investment banks are rapidly finding out they’re not so different after all, as shrinking profits highlight an urgent need for ‘soup to nuts’ process efficiency to deliver more value at less cost. Luckily, some of the technological advances of the past decade are paving the way for ‘utility-light’ approaches that can help banks achieve much needed back-office efficiencies without multi-year, multi-million dollar commitments.
In the past, investment banks have tended to design and sell a product first and worry about the supporting internal supply chain later. For a variety of reasons – whether regulatory, macro-economic, or technological – banks’ easy profit opportunities have become a distant, fading memory. Creating a new derivative with a high margin and expecting the back office to work out how to settle it and the middle office how to model its risk is no longer viable. Like any other industry, efficient processes and flexible service models are now required to meet client needs on a sustainable basis.
Getting ahead of the problems facing the industry
And while revenue opportunities are disappearing, hampered by capital and leverage constraints imposed by Basel III, other regulatory changes are also putting extra pressure on operational processes that to date have been systematically starved by short-termism
From collateral transfers to support margins for OTC derivatives under the European Market Infrastructure Regulation, and from pre- and post-trade transparency requirements under MiFID II to settlement time compression under the Central Securities Depository Regulation, operational failings are being exposed and penalised like never before.
The irony is that it is also at this time that banks can no longer afford to invest in more people or new infrastructure to get ahead of the problem. Faced with falling revenues – which slumped by as much as a third in the latest round of quarterly statements – COOs are contemplating cuts that even two years ago they would not have entertained. Traditionally, these firms hired in the good times and fired in the bad. But this will not bring the scale of savings required, nor retain the required levels of operational capacity.
Shift towards a new generation of outsourcing arrangements?
An industry faced with an urgent need to rationalise its common supply chain and related support workflows might present an opportunity for business process outsourcing providers. But successive waves of technology and new organisational structures have, by and large, failed to cut costs, create utility solutions to common headaches, such as reference data, or reduce head count costs to any meaningful degree.
Historically, huge swings in revenue have thwarted the consistent levels of investment required to streamline back-office operations and develop industry-wide capabilities.
Today, the scale of investment to achieve significant change is unacceptable to any bank. Firms including Broadridge and Fiserv are ramping up their back-office processing capabilities in anticipation of a shift toward a new generation of outsourcing arrangements.
In the future, investment banks may well source their back-office processing capabilities from giant operational utilities. But current constraints suggest this is likely to be the work of decades and does not necessarily solve the problems that still bedevil and undermine back offices.
Empowering people – creating agility
We cannot stay the same. We cannot change. What to do? As noted above, the answer may lie in an acceptance that investment banking perhaps isn’t so exceptional. Building efficient, highly automated supply chains based on common standards is the ideal in the long term; but in the short term, it is also possible to identify efficiency gains that do not involve lift-outs or multi-year legacy system replacement projects. In addition, even with more automation and common standards, exceptions to straight-through processes will remain a fact of financial operations life.
Utility-light solutions based on the collaborative, analytics-focused technologies that have already revolutionised other industries are emerging that can improve existing processes without reinventing them. From an operations perspective, for example, greater control, capacity and flexibility can be achieved at low cost by empowering staff with the skills and tools to handle the inevitable outages, exceptions, and unexpected requests more quickly and collaboratively.
In my 20-plus years in the operations departments of global investment banks, the contribution of people to efficient operations has proved a constant. This suggests it is likely to survive important new potential breakthroughs such as the application of distributed ledger technology to banks’ back offices. Even if the blockchain is a panacea, current proposed timetables suggests implementation well after the current operations crunch caused by post-crisis reforms.
When it comes to building flexible, sustainable, scalable operations capabilities, throwing people at the problem is no longer an option. But as technology-based innovators have shown, throwing solutions to the people just might be.