Trends and Innovations Driving Process Transformation in
the Financial Services Sector
Seoul Korea
April 2008
Donald Hanson
Global Financial Services Sector
Software Group
© Copyright IBM Corporation 2007
Thesis:
ƒThe world changes
ƒBusiness process must also change
ƒProcess INNOVATION will separate winners
from losers.
2
© Copyright IBM Corporation 2007
Changing demographics, in particular population aging, will have
a great impact on customer preferences and staffing.
Percent of Population 60+
In the Year 2000
<5%
Percent of Population 60+
In the Year 2025
5 – 12.4%
12.5 - 20%
> 20%
Labour Migrations
Wealth Disparity
Welfare
Source: The Corcours Group; IBM Institute for Business Value
3
© Copyright IBM Corporation 2007
…and traditional life-stage patterns are losing relevancy
Female Mean Age at First Marriage*
Same-Sex Marriage Status in Europe
Japan, 1910 - 2002
Increasing in Acceptance
WW2
Age in Years
28
27
26
25
24
23
22
21
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
02
55
60
19
50
19
47
19
19
35
40
19
30
19
25
19
19
15
20
19
19
19
10
20
*Years up to 1940: the age at which official submission was made; 1947-67: the age at which
marriage ceremony was conducted; 1968 and beyond: the age at which either the marriage
ceremony is conducted or started living together (for those years where official submission and
co-living/ceremony are in the same year). 1947-72 does not include Okinawa prefecture.
Source: National Institute of Population and Social Security research, Japan, Wikipedia; IBM Institute for Business Value
4
© Copyright IBM Corporation 2007
Over a third of the global labor market is undergoing an
industrial revolution
One Region’s Trend:
The United States
Top Ten Nations by Labor Force Size, 2003
A=Agriculture, G=Goods, S=Services
Nation
Labor
%
A
China
21.0
50
% WW
India
17.0
60
%
G
%
S
15
35
17
23
25 yr %
delta S
191
28
U.S.
4.8
3
27
70
21
Indonesia
3.9
45
16
39
35
Brazil
3.0
23
24
53
20
Russia
2.5
12
23
65
38
Japan
2.4
5
25
70
40
Nigeria
2.2
70
10
20
30
Banglad.
2.2
63
11
26
30
Germany
1.4
3
33
64
44
2015
2005
2005
United States
(A) Agriculture:
Value from
harvesting nature
(G) Goods:
Value from
making products
(S) Services:
Value from enhancing the
capabilities of things (customizing,
distributing, etc.) and interactions between things
ƒ The largest labor force migration in history
is underway, driven by urbanization, global
communications, low cost labor, business
growth, and technology innovation
ƒ About 50% of world labor is sourced from
just 10 nations
Source: www.nationmaster.com; IBM Institute for Business Value
5
© Copyright IBM Corporation 2007
However, the risk / return trade-offs of entering and operating in new
markets need to be understood...
Growth in Domestic Credit vs. Risk1
Composite Five-Year Risk Rating 2007-20121
50
45
Iran
LOW GROWTH
HIGH RISK
HIGH GROWTH
HIGH RISK
Average
CAGR = 7%
40
Circle represents
size of domestic
credit in 2025
Argentina
35
= US$ 750 bn
China
30
Indonesia
25
Russia
20
Mexico
15
Japan
Italy
10
Belgium
5
France
0%
Spain
Malaysia
Chile
Germany
Austria
Switzerland
Netherlands
LOW GROWTH
LOW RISK
0
Taiwan
Thailand
Ukraine
Turkey
Brazil
Saudi Arabia
India
Average Risk Score = 14
Greece
Poland
Sweden
Norway
UK Canada
South Korea
Ireland
Denmark
Australia
HIGH GROWTH
LOW RISK
USA
5%
10%
15%
20%
25%
Compound Annual Growth Rate of Real Domestic Credit 1995-2025
Note: Color and fill variations of the circles are used only to enhance readability. 1 Risk is a five-year composite risk scoring based on a number of political, financial and business risks.
Domestic credit is a broad measure of credit extended to companies, households and government and has been used as a proxy for banking assets by country. In each country a projection was
made based on the relationship between GDP and domestic credit. Sources: Risk data: “Global Risk Service: Executive Overview.” Global Insight. Fourth-Quarter 2006. Domestic credit and
GDP projections:Economist Intelligence Unit, 2007; IBM Institute for Business Value Analysis.
6
© Copyright IBM Corporation 2007
Increased computing power and data storage will enable
unprecedented levels of process innovation and data analysis.
More data can be stored as…
…storage density increases, and…
…storage costs fall
100
100
Price / MegaByte ($)
Areal Density (Gb/in2)
1000
1000
10
1
0.1
0.01
10
1
0.1
0.01
0.001
0.001
0.0001
1980
1990
2000
2010
Drives
CD
Blue Laser
Tape
Lab Demos
Millipede
1980
1985
1990
HDD
1995
DRAM
2000
2005
2010
Flash
At the same time, more computing power becomes available as…
…computing power increases…
…and grid computing makes better use of it
100000
Human brain ops
5
Forecast Grid Computing
Spending In US$ billions
Tera Flops
10000
IBM Blue Gene/P*
1000
IBM Blue Gene/L*
Riken MDM*
ASCI
100
SETI@Home
Purple
Earth
Simulat AS
or
CI
10
ASCI White
IBM Deep Blue®*
US Dept of
Energy Desktop
1
1995
2000
2005
4.6
CAGR
2003-08
240.8%
4
3.3
3
2
1.2
1
0.6
0.0
0.1
0
2010
2015
2003
2004
2005
2006
2007
2008
Source: ASCI Roadmap www.llnl.gov/asci, IBM, Brain ops/sec: Kurzweil 1999, The Age of Spiritual Machines, Moravec 1998, http://www.transhumanist.com/volume1/moravec.htm
7
© Copyright IBM Corporation 2007
Operations will transform as the value chain becomes
componentized geographically and through partnering
ƒ Technology removes geography
from the cost equation
ƒ Value chain is virtualized to
improve service delivery, reducing
cost focus on core competencies
Marketing
Product
Operations
Policyholder
Acquisition
Policy
Administration
Underwriting
Asset
Management
Channel Management
Customer Relationship Management
Enterprise Resource Management
Traditional Monolithic Value Chain
8
Claims
Management
“…we can expect
greater fragmentation
of the value chain. As
part of this, the
relevance of insurance
companies will be
questioned…” UK reinsurance executive
© Copyright IBM Corporation 2007
Executives cite new markets as their top growth opportunities and plan to
actively expand global revenues and footprints
Greatest Growth Opportunities,
Next Five Years1
Banks’ Pursuit of
Global Revenues and Footprint
(Percentage of Survey Respondents)
(Percentage of Survey Respondents)
FOREIGN REVENUES2
(Percentage of respondents)
Expand to new markets (organic)
Expand to new markets (M&A)
GLOBAL PRESENCE3
(Percentage of respondents)
n=228
In 5 Yrs
n=242
Target existing market (organic)
27%
gap
Today
Reduce costs, improve efficiency
8%
gap
Specialize, build expertise
In 5 Yrs
Leverage alliances
12%
gap
Today
n=459
Target existing market (M&A)
0%
0%
0%
10%
10%
20%
20%
30%
30%
40%
40%
n=208
n=203
Expand breadth of offerings
25%
14 %
gap
50%
0%
15%
30%
50%
50%
Veteran Market
Prospect Market
Worldwide Average
Note: 1What are your organization’s greatest opportunities for growth over the next five years? Select up to three; 2What percentage of your organization’s total revenue is generated
outside of its domestic market now? What percentage do you expect this to be in five years’ time? Foreign revenues represents percentage of respondent banks with over 50% or
revenue generated outside domestic market; 3In how many countries does your organization have a corporate or operational presence? What number do you expect this to be in five
years' time? Global presence represents percentage of respondent banks with presence in more than 20 countries.
Source: IBM/EIU Survey; IBM Institute for Business Value analysis
9
© Copyright IBM Corporation 2007
Strategy
...and several worry that the cost of entry – particularly into prospect
markets – is accelerating beyond their reach
Price/Earnings Ratios
(Selected largest banks in major markets, January 4th, 2008)
CHINA
Shangahi Pudong
China Merchants
ICBS
Bank of China
49
47
36
30
INDIA
HDFC
ICICI
State Bank
Canara
44
40
16
12
ƒ “Retail business in the emerging markets
is now too expensive: a bank entering
emerging markets must have another
underlying strategy”
- COO of a leading Japanese bank
BRAZIL
Banco do Brasil
Bradesco
Banco Itau
14
14
13
USA
10
Wells Fargo
Bank of America
JP Morgan Chase
Citigroup
9
9
8
UK
HSBC
Barclays
HBOS
RBS
ƒ “The cost per client is too high in many
emerging markets. The window of
opportunity has passed”
- COO of a leading Swiss Bank
10
7
6
ƒ “There is now too much competition to
enter these markets”
- CEO of a leading US Bank
6
Source: Major markets, Reuters, Interviews IBV survey, IBV analysis
10
© Copyright IBM Corporation 2007
A Banking Industry Case Study
Five key trends will drive banking to become a highly specialized market with tremendous demand complexity
Mega-Trends
IBM’s Vision - The Future of Banking
Customers
1
Customers redefine the rules
of the game
ƒ Pronounced shifts in demographics, attitudes and behaviors, in
addition to ubiquitous information, are giving customers
increased purchasing power
Competition
2
Universal banks and ultra-focused
niche players thrive
ƒ The marketplace will further consolidate and non-bank banks
and industry specialists will both compel and enable traditional
banks to specialize
Human Capital
3
Changing workforce composition
dictates new approaches
ƒ An older and increasingly mobile and diverse workforce will
require new and more flexible approaches to compensation
and performance management
Regulation
4
Regulatory burdens intensify
Technology
5
Technology improves inexorably to
enable breakaway value
ƒ Heightened requirements around privacy, security and
operational and partnership risk will require banks to take an
enterprise-wide approach
ƒ Advances in global connectivity, computing power, serviceoriented architectures, and data analysis will lead to
unprecedented functionality
Source: IBM Institute for Business Value
11
© Copyright IBM Corporation 2007
Trends & Projections – 2020 Mega-Trends
By 2020, the industry will be shaped by four mega-trends that
require innovative responses
Mega-Trends Shaping the Insurance Industry in 2020
1
2
3
4
Megatrend
Results
Consumer
Expectations
Active and informed consumers
across demographic groups reward
non-traditional operators
Technology-savvy clients are the
norm and loyalty is earned through
convenience & service
Insurance
Operations
Technology virtualises the value chain
and lowers barriers to entry
Interloper participation increases
compelling carriers to use more
aggressive sourcing strategies
Business
Performance
Insurance products are dynamic and
provide more consistent performance
Carriers are released from duration &
operational constraints improving
industry economics
Regulation
Regulatory coordination and affirmed
industry standards broaden to
international scales
Increased transparency and greater
use of automation allow markets to
thrive and increase competitiveness
Quelle: IBM Institute for Business Value
12
© Copyright IBM Corporation 2007
1
Banking customers will seek to optimize value from providers
that meet their needs at opposite ends of the spectrum
Polarization in the Customer Marketplace
Growth and
perceived value
“Bell Curves”
Yesterday
“Well Curves”
Today
Mass
Competitive Spectrum
Customers seek to maximize their
buying power for basic products/services
with low emotional investment
Mega-players are rapidly capturing
dominant market share by
delivering “good enough” value at
very low prices
Targeted
Customers seek to maximize “personal
value” when purchasing products/services
with high emotional importance
Differentiated specialists are building
profitable, high-growth niches by
delivering unique, relevant value to
targeted groups of customers
Source: Adapted from Daniel H. Pink, “The Shape of Things to Come”, Wired, May 2003.
13
© Copyright IBM Corporation 2007
2
Consolidations changes the nature of competition
Universal and Niche Players Thrive
Key Issues
Challenges
ƒ Recent growth has been fuelled by
M&A, a low interest rate environment
and continued cost cutting – the
sustainability of such trends, however,
is questionable
ƒ The retail banking industry continues to
consolidate, seeking economies of
scale, however, structural operational
effectiveness appears to be elusive
ƒ Specialists are gaining share by
focusing on specific operational
processes, products, channels or
customer segments
ƒ New entrants are encroaching on the
traditional banking market through
brand extension and by leveraging their
consumer expertise
Source: IBM Institute for Business Value
14
ƒ Continuing to grow by building market share
and enhancing profitability and market value
ƒ Realizing operational efficiency through
process optimization and removal of complexity
by integrating legacy bank processes and
systems post merger
ƒ Reaping the benefits of specialization within
the context of a full-service bank via both
internal and external specialization,
componentizing banking businesses and
sourcing best-in-class capabilities from both
within and outside the bank
ƒ Fighting disintermediation resulting from the
entrance of specialist and non-bank firms that
have superior customer relationships
The market will experience consolidation at its middle as large
banks look to selectively acquire mid-tier firms and as these
national and regional players consolidate among themselves
© Copyright IBM Corporation 2007
Lack of scale efficiencies require innovations in human capital
Comparison of Efficiency Ratios
for Top 150 US Banks
Somewhat
Important
5%
Assets vs Efficiency
100
R2 = <1%
Efficiency Ratio
80
Challenges
Not important
7%
ƒ Designing recruiting and retention
programs to ensure sufficient
talented staff – particularly in
customer-facing and supplier-facing
roles
Important
8%
60
Importance of Talent to
FS Firm Performance
40
Percent of Respondents2
Very
Important
80%
20
0
0
200
400
600
800
1,000
Total Assets ($ billions)
1,200
1,400
ƒ Designing training and career
development programs to retrain
and retain existing staff
ƒ Designing measurement and
incentive programs to monitor and
improve workforce performance and
productivity, and generate higher
levels of employee satisfaction
ƒ Outsourcing processes to reduce
costs and increase flexibility, and
learning to manage these
relationships effectively
ƒ Adapting management and
leveraging technology to reap the
benefits of workforce mobility
“Most research on the existence of scale economies in retail commercial banking finds a relatively flat U-Shaped average cost curve
with a minimum somewhere around the $10 billion of assets, depending on the sample country and the period analyzed.”
- 2004 Fed Study Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence
Note: (1) Efficiency Ratio - Total non-interest expense as a % of non interest income plus net interest income
Source: BAI, SNL Interactive, 21 Jun 04; Ibbotson Associates quoted in Forbes, 07 Jun 04; Electronic Payments Week, 5 October 2004; Dow Jones News Service, 5 October 2004,
IBM Institute for Business Value
15
© Copyright IBM Corporation 2007
4
Increasing demands for transparency mean significant costs as
banks seek to comply with new regulation from multiple sources
Regulatory Burdens Intensify
Key Issues
ƒ Globalization and consolidation in the
industry mean regulators increasingly
seek to provide a level playing field
and prevent excesses
ƒ Regulators seek to give markets a
greater role in the burden of
supervision which can only be
accomplished with greater
transparency
ƒ Alternative suppliers and channels,
coupled with client lack of confidence
in the industry, also results in demand
for greater transparency
ƒ Costs of compliance are high while the
financial benefits are not immediately
clear
ƒ The market demands – and
technologies enable – more refined
risk measurement
Challenges
ƒ Providing greater disclosure and transparency
to win back marketplace confidence
ƒ Organizing to comply with regulations and
requirements from several different sources across
the globe
ƒ Ensuring that the organization has the
operational capabilities to fulfill reporting
requirements as well as provide the desired
transparency to all stakeholders – regulators,
shareholders, clients, market analysts and others
inside and outside the organization
ƒ Establish integrated enterprise-wide systems
and processes to provide transparency and
compliance
ƒ Reduce costs of compliance and leverage these
investments to provide additional business value
Source: IBM Institute for Business Value
16
© Copyright IBM Corporation 2007
5
Advances in technology will enable banks to differentiate their
offerings and react to competitive threats with greater agility
Technology Improves Inexorably
Key Issues
ƒ Service-oriented architectures
increase business process
flexibility and accelerate
disintegration of the value chain
ƒ Pervasive computing reduces
transaction costs of interconnecting
business activities with customers
and business partners
ƒ Increased amounts of data and
new approaches to data analysis
provide new possibilities for
differentiation, responsiveness and
increased efficiency
ƒ Widespread digitization increases
security and business continuity
threats
Source: IBM Institute for Business Value
17
Challenges
ƒ Adjusting to a faster pace of change as service-oriented
architectures enable faster software development
ƒ Responding to increased specialization as accelerated
deconstruction of the value chain and global commerce
platforms are driving increased specialization and opening
the market to new entrants
ƒ Replacing core systems that will impair the leap to more
agile business structures
ƒ Enabling faster and better decision making as leading
banks will pull away from competition with faster, better and
more granular decision-making using advanced analytics
ƒ Enhancing data quality and integration capabilities by
leveraging increased computer power and rules-based
intelligent systems that will support efforts to build an
intelligent enterprise
ƒ Addressing the growing need for security and resilience
as banks’ fundamental trustworthiness is under threat - new
technologies can provide tighter security and privacy, better
authentication, and greater operational resilience
© Copyright IBM Corporation 2007
Impacts – Old versus New
Success in the 2020 will require insurers to develop new
models while harvesting value from existing processes
Successful practices: Old model vs. new model
Customers
Old
model
New
model
ƒ
Less price conscious
with age
ƒ
Rely on channel for
expertise, education
ƒ
Commoditised, static
products force cost
competition
ƒ
Repeat sales to grow
commissions
ƒ
Optimizing existing
systems
ƒ
Rely on pull for self
education
ƒ
React to regulation
changes
ƒ
Unclear language
ƒ
Nature of sale justifies
commission
ƒ
Working out of silo
mentality
ƒ
Customised and
dynamic, derived
from flexible chassis
ƒ
Independent, direct
ƒ
ƒ
More advocacy and
brokering
Integrating new
systems
ƒ
Proactively adapt to
market, regulatory,
and business model
evolution
ƒ
Build new systems
from components
ƒ
Buy offered product
ƒ
Embrace convenience
via technology
ƒ
Less need for
intermediary
ƒ
Use automated
advice and servicing
Flexible terms
(JIT, 3-60 months)
ƒ
Personal Risk
Contracts
Forced
responsibility
Operations
Short, fixed terms
Little concept of risk
management
ƒ
Distribution
ƒ
ƒ
ƒ
18
Products
ƒ
Service Orientation
ƒ
Well educated
ƒ
Offer risk mgmt
expertise
ƒ
Provide niche
service contracts
© Copyright IBM Corporation 2007
Business Process Management tools will enable dramatically
improved process innovation
Area
“The payments business constitutes
up to 35% of revenue and 40% of
costs for banks”.
Regulatory
compliance
BPM centralizes, standardizes
and automates the business
rules and workflows, ensuring
compliance and shorting timeto-compliance for new/
changing regulation
StraightThrough
Processing
(STP)
Rules automation, workflow
and integrative capabilities,
inherent to BPM, simplify
realization of STP
Business
process
outsourcing
and
collaboration
BPM facilitates business
process outsourcing and
collaboration with partners
through process modelling,
workflow, unified messaging
and real-time communications
The Boston Consulting Group
•Increased revenues as much as 10% through
differentiation
•20 - 40% savings in time associated with fault
finding procedures due to streamlined operations
•As much as 15 - 20% cost reduction in key areas,
such as exceptions
•Ease of switching supply chain partners depending
on costs/ availability
Key Business Drivers
New entrants BPM can help jump-start new
entrants in retail banking,
connecting back office
operations to customer service
•Lower compliance and risk exposures through
improved, adaptive process control
19
© Copyright IBM Corporation 2007
Don’t just automate. INNOVATE !!
Automated underwriting software fueled the
Subprime industry boom; lack of oversight and
governance resulting in system's misuse
contributing to meltdown,
The New York Times, 2007
“It is impossible to separate IT and business strategy.
IT doesn’t support the business, it is the business.”
- Asiff Hirji
CIO Ameritrade
20
© Copyright IBM Corporation 2007
The Next Wave: Innovation through Business/Technology integration
Linking the business model innovation with technology enablers is critical
86%
Banking CEOs on Importance of
Business-Technology Integration:
81%
61%
Integration Gap
in Banking
46%
Banking
ƒ “…integration of business and
technology is critical..”
ƒ “…there are few, if any,
processes that are not totally
dependent on technology…”
All Industries
Integration of
Significant
Importance
Significant Extent of
Integration
ƒ “…technology is critical as a prerequisite, innovation required to
generate value…”
Sample size: Banking = 84, All industries = 765
Source: IBM 2006 CEO Survey
21
© Copyright IBM Corporation 2007
We surveyed over 600 executives and conducted secondary research to
determine the impact of globalization on the industry
ƒ
ƒ
ƒ
Where will the future opportunities emerge?
What will customers be willing to pay for?
How will the bases for competition evolve?
ƒ
Which business models will succeed?
IBM Institute for Business Value
Scope
Approach
ƒ Our analysis focused on gaining insights
ƒ We surveyed 644 business leaders in 89
from selected banking industry participants:
countries from 320 firms:
–
Universal banks
–
Qualitative interviews of 184 executives
–
National/regional banks
–
–
Community banks / savings & loans /
cooperative banks and building societies
Survey of 460 executives, in partnership with
the Economist Intelligence Unit
–
30% Americas, 38% EMEA1 and 32% Asia
–
Specialist and boutique banks
–
Others: Industry vendors and service
providers, non-governmental organizations,
academics, regulators
ƒ We conducted extensive secondary
research and developed quantitative
models
http://www-03.ibm.com/industries/financialservices/index.jsp
22
© Copyright IBM Corporation 2007
Conclusion
Leaders innovate in response to mega-trends
Process automation will produce marginal results.
Process innovation will produce break-away results
Technology will be the key enabler of process innovation
© Copyright IBM Corporation 2007