FSPs Need To Face 'Business Killers' Head On: Gartner

Six ‘business killers’ still threaten to destroy financial services institutions in the next 24 months, whether an economic upswing occurs or not, according to Gartner. These issues need to be addressed, or they have the capacity to kill the recovery for most financial-services providers (FSPs). Analysts said that those institutions that face the ‘business killers’ head on will place themselves better to ensure that they not only survive an upturn, but to take advantage of future opportunities.

“It has been a tumultuous year for banks and financial services providers and some will continue to face a rocky path for the next two years – a critical period when leading banks will take action to deal with both the recession and a possible recovery and thereby establish an unassailable lead over laggards,” said Peter Redshaw, research vice president at Gartner. “IT departments have been fighting frantically to help keep their organisations’ heads above water and they’d be forgiven for thinking that the worst is over. That may be true but it is no time to relax.”

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While some FSPs have addressed the dangers and are now in a position to rebuild their brand and business, most others still need to confront these threats. More than 50 percent of banks will still be in cost-optimisation mode in mid-2010 and making no plans or investments for any recovery. Gartner has identified six business killers that financial services institutions and their IT departments need to overcome if they want to survive and even thrive:

1. Organisational Inflexibility and Resistance to Change

Top-down changes to governance can be initiated when senior job roles are re-aligned with processes and with customers – not with products or business units. Gartner predicts the emergence of roles such as a head of payments, or process improvement, or customer interactions. These are roles that are responsible at a strategic level for linking the people with the appropriate processes and systems across the FSP and at a lower level being managed on a daily, operation basis by business process management (BPM) suites.

2. Cost-Driven, Revenue-Shy

Many FSPs focus too much on costs rather than revenue as the emphasis shifts to efficiency rather than effectiveness. “Part of the problem is that every time one process is streamlined and automated, a new product or a new channel pops up and has to be supported by IT. Much of the cost improvement in recent years has been due to making lower provisions for loan losses – not a good strategy for the future. FSPs should base their targets on profitability, not just cost management,” said Redshaw.

3. Tactics Win Over Strategy

Many FSPs focus too much on short-term thinking without having a wider strategy in place. Examples are a strong quarterly result emphasis and the lack of a coherent IT strategy. Banks miss a thorough analysis of the financial supply chain and the relevance or position of their bank within it. They also neglect supply-chain-management changes in distribution networks such as the rise of social networking and the crowd-sourcing implications. FSPs need to avoid two extremes: first, assuming that unpredictability means that strategies are worthless, so they become purely reactive and tactical; second, assuming that unlimited flexibility is a desirable state.

4. Internal Focus and Customer Neglect

Trust and confidence in traditional FSPs has been severely dented during the current crisis. Some FSPs are perceived as direct causes of current misfortunes – lost money, lost jobs, etc – and may be actively targeted for boycotts or even sabotage. However, hardly any FSPs actively offer advice to customers that is specifically designed for this recession. Instead, they devote a greater proportion of their efforts to internal initiatives designed to cut costs, make operations more efficient, shore up balance sheets and ensure regulatory compliance. The focus is inwards not outwards, but FSPs should identify and work to customers’ processes rather than their own.

5. Risk: The Tail that Wags the Dog

Risk management has gained significant importance in many banks and insurers as a consequence of the financial crisis such as additional stress tests for financial institutions and informal cross-border consultations. Redshaw said, “New legislations should be factored in when FSPs define new products, build up new sales and service channels or decide on organisational changes; however, they shouldn’t lead to a situation where the risk-tail wags the dog.”

6. Starved of Innovation

Around one third of FSPs are investing in future economic recovery; however, FSPs are not necessarily good at innovation. Gartner research from May 2009 conducted among 92 executives at banks worldwide showed that the most important innovation goals are to improve product or service quality, to extend a product range, to replace products and services, to comply with regulations and to protect market share. However, only 30 percent of FSPs in North America, 53 percent in APAC and 66 percent in Europe have established a formal innovation process.

“FSPs must create a more outward-facing set of objectives for IT and a culture that incorporates innovation best-practices at its core. IT strategies and projects need to be risk-aware but they also need to be innovative and bold,” said Redshaw. Most importantly, IT departments at FSPs will need to support a new operating model from their board that is designed to cope with a world that has low growth, small margins, high volatility and heavy regulations.