IBM Business Consulting Services
Simplify to Succeed
Optimise the customer franchise and achieve
operational scale: Retail financial institutions in 2005
Futures Series
Executive Summary
1
This paper is part of IBM Business Consulting Services on-going
commitment to forward-looking industry and business points of view,
and our aim to help companies and industries Transform Futures.
table of contents
Rethinking the business model
4
Understanding the new value chain
5
Optimising the customer franchise
5
Maximising the breadth, depth and flexibility
of products and services
8
Optimising the scale and efficiency of
operations
9
Moving to a component-based business
model
11
2
The Reality of Change
Ceaseless change drives the retail financial services
The result is that FIs suffer two huge handicaps in the
sector: new structures, new technologies, new forms
competitive race: Their structures are too rigid to
of competition. Seizing the opportunities produced by
change without causing massive internal disruption,
change is the crucial emergent challenge for the
and their organisations are riddled with cost duplica-
sector.
tion.
Many leading retail financial institutions (FIs) have
The urgent need, therefore, is for FIs to acquire a
responded by restructuring and opening up new
more flexible, customer-centric business model, while
sources of revenue. But they are already reaching the
simultaneously achieving economies of scale and
limits of their capacity for change. Moreover, the
retaining the flexibility to thrive in times of change.
larger FIs are, as a class, falling behind their smaller
Winning FIs of the future will be those that rethink
counterparts in the race for higher returns.
their business models, organisations, processes,
technologies, cultures and performance measures in
The reasons for this are clear.
fundamental ways.
In seeking to adapt, FIs have tended to respond in a
piecemeal fashion: by making incremental changes to
To view the full publication “Simply to Succeed”,
their structures rather than by tackling the problem at
please visit our website at www.ibm.com/services.
its roots. This has left them with excessively complex
business models, ones that are typically built around
individual delivery channels (e.g., telephone or the
Internet) or products (e.g., mortgages or insurance).
These tightly integrated silos have little lateral
contact with other parts of the organisation, and
hence tend to sub-optimise the value of the franchise.
13
2005: John Consumer Gets the Message
Breakfast in the Consumer household. John boiled the
him, and the quality of service was surprisingly good.
kettle and reached for his favourite packet of ground
He had also despaired of his old bank: the 9:30 p.m.
coffee. Empty. He’d have to make do with instant: not
customer satisfaction surveys, endless junk mail and
the best start to his day.
total failure to tell him that his life insurance policy
might not meet his needs!
He sat down and picked up his mobile 3G device. The
overnight message from InsurBank told him his net
The joy now was that all contact with the bank
worth as of midnight: $37,321. That was the total of
happened when it suited him. Furthermore, all
his savings and investments minus the home loan on
communication channels showed his full account
their apartment. It was slightly more than he
details in real time, and in a consistent format.
expected, but the statement showed he had just been
Everyone he spoke to seemed to know his history and
credited with the latest monthly interest and
preferences, and he could pick up a conversation as if
dividends on his savings, which InsurBank guaranteed
he had his own financial adviser. As the years went by
would always be among the market’s top decile.
and the number of financial products he needed
increased, he also began to tap into InsurBank’s
John had some planning to do. He was off on holiday
financial planning and inheritance services and make
with his family and needed travel insurance (and it
use of the discounted deals (holidays, theatre tickets,
was his wife’s birthday today, the message reminded
etc.) offered by the network of retailers that
him). Insurance was not something John cared to
InsurBank had put together.
spend too much time on, so he had subscribed to
InsurBank’s bundled family insurance coverage. His
InsurBank also seemed to know about his family and
car, house, travel requirements, his life, even Rufus
lifestyle. His daughter Sophia came top of her class
the dog, were all on the same policy. However he
at technical college and they offered her a loan to set
didn’t pay all year round; he just activated the travel
up a small engineering business. Another budding
component when he needed it.
customer.
It was back in 2002 that John joined InsurBank. At
John sipped his coffee. It tasted dreadful. No point in
first he had been sceptical about putting all his
lingering. Anyhow, he had an appointment at
products with one provider. But their style intrigued
InsurBank’s local branch to discuss which mutual
funds might be suitable for his next investments—they
supplied a wide range from a number of providers
with proven track records. He might also use an
Internet terminal in the branch to send flowers to his
wife. And they always had good coffee.
24
2005: Another Bad Day at InflexiFinance
Pierre Grüman growled. Another day, and more
Then there was InsurBank’s extraordinary decision to
market punishment for InflexiFinance, once his
move its back-office processes to lower-cost countries
country’s leading retail financial institution.
in the Southern Hemisphere. The political and
economic risks—to say nothing of the loss of control—
Life had seemed so rosy at the millennium.
seemed absurd to Grüman. But InsurBank had
InflexiFinance was the first FI to install interactive TV
mitigated these risks by spreading the work across
banking. It also added insurance brokering and asset
South Asia and Latin America.
management to its core banking products to offer a
complete wealth management service to its custom-
What’s more, Grüman’s master plan to create a
ers. He was so certain then that InflexiFinance would
wealth management offering was not delivering the
dominate the market and reward its shareholders, as
goods. Although his CRM systems had identified the
it had done for years. But today, it was not he who
mass affluent as a potential market, InflexiFinance’s
was being interviewed by CNN and CNBC, but his
size and complexity made them impossible to serve.
bitter rival Marie Garcia, CEO of InsurBank. Why was
InsurBank, on the other hand, had reorganised itself
their P/E ratio 18 and his a mere 12.2? He flicked on
around its chosen customer segments and had the
the television: There she was again, beaming at the
flexibility to bundle together the right products for
interviewer on the Finance Channel.
them. InsurBank now sold 4.3 products to each
customer against InflexiFinance’s 1.6.
It was back in 2002 that the two companies started
to pursue different strategies. While InflexiFinance
Grüman looked up as InflexiFinance’s heads of
continued its quest for size and developing in-house
lending and insurance walked into his office, arguing.
capabilities for everything, InsurBank announced that
There was no way they could cross-sell their two sets
it was going to focus on what it did best, and deal
of products to the same customer because they
with a select customer base. InsurBank formed a
couldn’t use the same customer data. Furthermore, as
distribution alliance with another of their rivals,
their salespeople’s pay was geared to sales volumes
SmartCash, to sell each other’s products. The idea of
rather than the overall customer relationship, the two
working with a competitor had seemed ludicrous to
teams had little incentive to help each other. He had
Grüman: Why would SmartCash want to help
struggled, without success, to break down these
InsurBank? They would end up fighting. But it now
boundaries. How different it was at InsurBank, where
appeared that both institutions had made consider-
general managers served customer segments and had
able savings through their joint venture, and had
incentives to pass customers around the organisation.
landed some lucrative third-party partnership deals as
Pierre Grüman tried to growl again but all he could
well, while maintaining their independence at the
manage was a groan.
front end.
53
Rethinking the
Business Model
Each component serves a unique purpose, and
collaborates with other components within the
business model, using agreed cost and service levels.
To make the transition to a CBB model, FIs must
In order to succeed, FIs need a business model which:
break the value chain down into its component parts
and dismantle the end-to-end silos. Each component
• Can handle rapid and repeated change
must be given a high degree of autonomy, but linked
• Possesses both scale and flexibility
to the rest of the organisation through common
• Secures the long-term loyalty of the customer
messaging standards, information systems and
To achieve these often-conflicting goals, an FI must
service agreements. The components must operate
view its business not as an integrated whole but as a
within a flexible business architecture supported by
federation of functions which collaborate to create
appropriate IT, processes, performance measures and
value, and which can be added to or removed from as
organisational structures. If the CBB model is to work,
change dictates.
all its parts must communicate and collaborate
seamlessly with each other.
This is what we call the component-based business
model (CBB model). We define a component as a
At the heart of the CBB model lies the ability to
group of tightly coupled business activities supported
achieve the opposing benefits of scale and flexibility
by appropriate information systems, processes,
while simultaneously maximising long-term customer
organisational structures and performance measures.
loyalty and share of wallet.
Component Model
Traditional Approach
Private
Banking
Segment
Mass Retail
Segment
Product Specific
Delivery
Sub-Prime
Segment
Mass Affluent
Segment
Sub-Prime
Segment
Private
Mass Retail
Banking
Segment
Segment
Mass Affluent
Segment
Ultra High
Net Worth
Segment
Ultra High
Net Worth
Segment
Distribution
Marketing Sales
& Distribution
Sector differentiated marketing, sales
and delivery
Product
Manufacture
Parameterised Product Assembly
Manufacturing
Product options support and
Component based product manufacture
Operations
Low Cost, High Quality Servicing
Shared
Facilities
Operations
Product
Silo 1
Product
Silo 2
Generalised operations and shared
facilities
Product
Silo 3
Traditional approaches have attempted to create discrete product ‘silos’
- Systems and business processes are tightly coupled along the value
chain
- Capabilities are duplicated across silos
- Customers experience fragmented serivices
A component model provides business flexibility and process optimisation
- Distribution is tuned to the customer segment
- ‘Assembled’ product combinations re-use Manufacturing capabilities
regardless of sources
- Operations achieve enterprise-wide scale economies
64
The CBB model will achieve two goals. It will allow
FIs:
• To extract the maximum value from each part of
the value chain
• To add or remove components as required without
letting complexity creep back into the system
Understanding the
New Value Chain
FIs’ value chains can be divided into three interconnected business areas:
Optimising the
Customer Franchise
• Distribution covers all customer-facing activities,
including delivery channels, servicing, pricing,
cross-selling and marketing. Here the challenge
will be to optimise the customer franchise.
• Manufacturing generates and assembles products
As customers have become more aware of their
and services in whatever form—and through
financial services needs, they have also become more
whichever channel—the market demands.
willing to shop around for the best deals. Customer
Maximising the breadth, depth and flexibility of
loyalty is falling. The shift toward multiple providers
products and services will be the key issue for FIs.
is costing FIs valuable incremental business and
threatening their share of wallet. New entrants have
• Operations focuses on the essential business
also sharpened customer expectations.
utilities, fulfilment processes and account
transactions (electronic payments, paper process-
FIs have had mixed success at exploiting
ing, customer data, etc.). To succeed, FIs will focus
on optimising the scale and efficiency of opera-
their brands
tions.
FIs have low brand recognition: no retail financial
services brand features in the world’s top 10. On the
other hand, new entrants, be they supermarkets or
car manufacturers, have been very successful at
extending their brands into financial services.
Investment by FIs to meet customer needs
has enjoyed only limited success
CRM tools have been used to create mass-market
solutions without developing the skills to make better
use of customer data or gain a fuller understanding of
customer needs.
75
Making customer relationships
profitable
Few FIs have seen radical improvements in crossselling, servicing and share of wallet from their often
significant investments in CRM.
Successful FIs will radically redesign the customer-
The cost of servicing customers continues to increase
facing parts of the value chain. FIs will have to learn
despite the proliferation of lower cost distribution
how to make every customer relationship profitable.
channels. Rising transaction volumes are cancelling
FIs will re-organise their customer-facing
out any savings.
operations around customer segments
The vision of the retail customer
By 2005, FIs will be switching the focus of their retail
By 2005, the dominant organising principle will be by
founded on an understanding of customer behaviour
customer segment rather than product or channel.
and lifetime value. Each segment will be built around
The five customer meta-segments will be: sub-prime,
an appropriate mix of channels and products.
operations from products to segments of customers
mass retail, affluent, high net worth and ultra-high
Technology will also allow FIs to create a single
net worth.
operational view of the customer (SOVC) by pulling
Regardless of which market segment they belong to,
together all the details of the relationship. This will
customers will:
allow the FIs to service customers through any
channel at any time, and provide customers with a
• Be mobile–aware that they can change providers
seamless view of their accounts in real time.
easily to meet their requirements
• Expect a high level of service, and be turned off
Understanding the lifestyle needs of the
when it is poor
customer will be key to a successful
• Expect to communicate with their FIs through the
retailing strategy
channels they choose, and receive consistent
FIs will make large strides towards understanding
service
their customers’ behaviour, and this will enable them
to pursue lifestyle customer strategies—ones driven
• Be unimpressed by poor attempts at product and
not by events but by values.
service innovation
• Be intolerant of CRM hard-sell practices
Leading FIs will move to customer-level
• Expect fair value and transparent charging based
pricing
on the entire relationship
Rather than pricing at the level of the product or
• Migrate toward brands with whose values they
account, FIs will use sophisticated pricing algorithms
identify
to price according to the customer or household.
• Be prepared to reduce the number of providers
they use
6
8
Quality of service will be the competitive
Brand positioning will play an increasing
frontier
role in the success of FIs and new entrants
FIs that are successful at delivering service quality
By 2005, two or three FIs will have achieved a global
will benefit through greater customer loyalty and
brand while non-financial enterprises will continue to
wallet share, and by moving the customer relation-
exploit their brands to gain entry into the financial
ship onto a complete, lifetime basis.
services market.
Successful multichannel approaches will
Priority actions for optimising
the customer franchise
differentiate between type of customer and
sales function
• Rapidly migrate to a customer segment model for
A physical presence will be essential to success. The
the customer-facing parts of your business.
move to the future is not about eliminating the
physical side of distribution and moving to a Web-
• Build and reward loyalty based on the entire
based approach but rather in educating customers to
customer relationship to extract the fullest value
use the right channel to address their specific
from the customer.
transaction needs. This requires putting ‘high touch‘
• Make CRM a long-term philosophy.
ahead of ‘high tech’.
Leading FIs will successfully move to a
channel-agnostic model for distribution,
leading to increased differentiation in
competitive positioning
For many FIs this will require rolling back channelspecific investments that have already been made to
simplify the infrastructure required to migrate to a
channel-agnostic model.
9
Maximising the
Breadth, Depth and
Flexibility of Products
and Services
Product assembly is not yet a core
competency
Many FIs still address the evolving needs of their
customers by making incremental changes to their
systems to add products and services.
Although FIs are investing in product systems to
The vision for product
manufacturing and assembly
increase their range and flexibility, they need to do
The ability to assemble the right products and services
more to address the full product and service needs of
at the right price and satisfy the full financial needs of
their target customer segments.
their customers will separate winning FIs from the
rest.
Many products have become commodities
The market for retail financial services is becoming
The management of wealth will become the
increasingly commoditised as new channels and new
mantra
entrants erode entry barriers, facilitate quick and
Wealth management will provide the philosophy that
easy comparison shopping, and increase the ability to
replaces the product-based view of the customer with
migrate accounts between FIs.
an all-embracing lifestyle perspective. Wealth
management—divided into wealth creation, wealth
preservation, and wealth transfer—will define the way
each customer is addressed. In turn, the customer will
Operational Processors are more highly valued
than the FIs they serve
want best value across the full range of services,
rather than just product-by-product. FIs adopting this
P/E Ratio
30
approach will gain an increasing proportion of their
25
revenues from advisory and fee-based services.
20
More FIs will build sources of revenue
15
outside their traditional markets
FIs will expand the range of products and services they
10
offer, both within the traditional range of financial
services products and through value-added non-
5
financial products and services.
0
Operational
Processors
Banking
Sector
Average
Insurance
Sector
Average
Operations processors include Fiserv, First Data Corporation, Jack Henry and
Associates, Total System Services.
Banking sector average taken from estimates published in the following Goldman
Sachs research reports: Appelbaum, L. E. et al, "Banks: Regional, United States",
April 8, 2002, Leadem, S. R. et al. "Banks, Europe", March 12, 2002.
Insurance sector average taken from estimates published in the following Goldman
Sachs research reports: Zief, J. H. et al, "Weekly insurance wrap-up", April 5, 2002
European ratios calculated using data from Burden, R. et al, "Insurance, Europe"
January 9, 2002.
8
10
Product sourcing and assembly will become
core competencies
Rather than competing in the customer-facing end of
the business, some companies will become product
suppliers with a purely manufacturing role. Given the
present pattern of customer touchpoints, retail banks
are more likely to succeed at the front end because of
their more regular contact with the customer, while
insurance and investment management firms, which
deal with customers less directly and frequently, may
deploy their skills in manufacturing.
Whatever their approach, FIs will have to supply
packages of products and services that satisfy the full
needs of customers. This will put a premium on the
ability to either manufacture in-house or source
Optimising the Scale
and Efficiency of
Operations
externally all the necessary package components. The
product assembly function will, therefore, grow
rapidly in importance.
Priority actions to maximise the
breadth, depth and flexibility of
products and services
While FIs are achieving economies of scale, their
progress is slowing down.
• Broaden the range of products and services to
Opportunities for easy cost reduction are over
embrace the entire spectrum of customer needs.
in many domestic markets
• Explore opportunities to supply products and
services outside traditional financial services
The first phase of cost reduction, which focused on
boundaries.
reducing employees, centralising processes and other
initiatives like outsourcing, is over. Most of the
• Learn the skills of product assembly.
significant players, particularly on the banking side,
have few obvious routes to cut costs further.
The benefits of consolidation are dwindling
Mergers have generally failed to deliver the promised
shareholder value. While scope for consolidation still
exists in the U.S. and some Asia-Pacific markets,
Europe is coming close to saturation in some countries.
FIs are increasingly having to look abroad, or to
strategic partners, for expansion.
9
11
The value of achieving scale in processing will be
twofold:
• Some FIs will achieve best-in-class economics in
certain operational components and use these
capabilities to provide these as services to other
FIs, thereby creating new revenue sources and
substantial shareholder value.
• Small to mid-sized players will have access to a
best-in-class provider, thereby rapidly improving
their operating costs and product service.
Operations will be configured around three processing
layers:
• Service representatives who will support customerfacing staff and assist in first-level contact with
the customer
Despite the growth of cross-border
commerce, big hurdles to international
• Complex processing units requiring specialist
expansion still exist
knowledge
Cross-border differences in regulation and competi-
• High-volume, automated processing units
tion still influence the investment community’s view
of the balance of risk and reward in the financial
FIs will need to break up the value chain and
services industry: Only the proven players tend to get
optimise each component
rewarded.
The benefits of creative approaches can be realised at
many levels: organisational, customer and share-
The vision for operations
holder. FIs which adopt them will be able to cut their
Considerable opportunities exist to radically trans-
without reducing their channel or sales capacity.
operating costs and increase their capital flexibility
form the operations of FIs. The challenge is to
optimise operations both internally and through
Collaboration with financial institutions and
combinations with other institutions, including
non-industry players will become the norm
competitors, to achieve economies of scale. This will
The new marketplace will be dominated by collabora-
also lead to the emergence of new specialised
tions and alliances among financial services competi-
institutions and the migration of work across
tors, technology companies and non-traditional
geographic boundaries.
financial services providers. We will also see the
emergence of co-opetition—co-operation ventures
between competitors to gain advantage in a particular
area.
10
12
The migration of work to lower-cost
economies will accelerate
Operations and support will move to low-cost regions,
driven by wage arbitrage and backed by guaranteed
service level agreements. Leading FIs will view
Moving to a
Component-Based
Business Model
offshoring, or global sourcing, as a key element in
their globalisation strategy.
The management challenge
New competitors will appear in financial
Making the move to the CBB model will require a new
services functions
set of management skills and tools. Managers need
As FIs break up the operations chain, operational
to:
processors will emerge to focus on particular parts of
it. Some of these will emerge out of existing FIs which
• Create new performance measures
decide to spin off successful operations. Some will be
• Appoint entrepreneurial managers to lead
new players who spring up to take advantage of areas
components or groups of components
of the market where established players have little
• Ensure that senior executives are skilled at
core competency or competitive advantage. Only the
managing the entire portfolio of components while
largest financial institutions will be able to compete
retaining the ability to enter and exit areas of
with these low-cost operational processors. It is likely
opportunity
that many operational processors will not be created
• Structure measurement systems and service level
by FIs but by other industry participants (such as
agreements not only for activities and processes
service providers or technology vendors).
within the organisation, but also for those that will
be executed by external parties
Technology will increasingly be a critical
factor in moving toward the CBB model
• Develop third-party relationships to achieve
mutually beneficial outcomes rather than
Central to this is alignment to a component architec-
conflicting goals
ture in which each component serves a unique
purpose, and collaborates by means of a common
• Recognise that a significant amount of training
and re-tooling will be required to get managers
messaging standard.
across to the CBB model
To move to this architecture, existing systems need to
be re-aligned and possibly augmented with new
• Align compensation schemes and performance
metrics with the new model as a first priority
facilities to match component boundaries—dividing,
extending and retracting their scope as necessary.
• Recognise that cultural change will represent one
of the greatest challenges to a successful
transition to the CBB model
Priority actions to optimise the
scale and efficiency of
operations
• Drive component owners to be best in class.
• Take advantage of wage arbitrage opportunities in
lower-cost economies.
13
11
Think big, start small and act
fast
4. Force operational component owners to become
best in class. Where this can be achieved with
an in-house unit, seek opportunities to spin it
The migration to a CBB model is a multi-stage
out as a standalone business and create a new
journey. The migration must take advantage of
source of revenue. Where in-house units cannot
initiatives that may already be underway to reduce
be best in class, outsource to achieve economies
costs, increase flexibility and achieve scale. Begin by
of scale.
proving the power of the CBB model in one part of
the value chain and use the lessons learnt there to
5. Develop new management competencies and
drive change through the rest of the organisation.
measurement techniques to ensure the success
Migrating to the CBB model requires both the break-
of the CBB model.
up of the existing integrated business model and the
6. Communicate your intentions clearly to the
networking of the new components that are created.
outside world and explain how the move towards
The high-level route map to the CBB model can be
a CBB model will improve revenues, cut costs
summarised as follows:
and make better use of capital.
1. Rapidly migrate to a customer segment model for
7. Align your IT portfolio and architecture with your
the customer-facing aspects of your business, and
business architecture. Ensure that the transfor-
provide a differentiated service to each segment.
mation is business-driven and has tight linkages
to IT.
2. Assess your competitive position in each component of your business model and accept that
collaboration will become the norm in many parts
of the value chain.
3. Broaden your range of products and services to
meet the full spectrum of customer needs, from
wealth creation through to wealth preservation
and transfer. This may necessitate forming
strategic alliances and co-branding products.
14
15
About the Authors
Shanker Ramamurthy
Shanker Ramamurthy is a New York-based Strategic Change Solutions consultant in IBM Business
Consulting Services Financial Services practice. He has more than 16 years of consulting experience
and has worked with financial institutions in more than 20 countries in North America, Europe and the
Asia-Pacific region.
Michael Robinson
Michael Robinson is a Strategic Change Solutions partner in IBM Business Consulting Services
Financial Services practice based in London. He is a lead practitioner in the delivery of strategic
transformation work for established financial institutions and new entrants. He has performed work
across the UK and Europe,and has more than 15 years experience as a financial services consultant.
Contributors
Julie Asfahl, Kathleen DeGood, Jack Diggle, Dan Golosovker, John Hallsworth, Ramesh Nair,
Muriel Oatham, Guy Rackham.
Special thanks to our many research participants for their valuable insights, and to David Lascelles
for his editorial expertise
Editorial Board
Mark Austen, Thomas Barrett, Saul Berman, Pedro Castañeda, Glenn Finch, Robert Gould,
Angus JS Hislop, Charles Leedman, Salomon Mizrahi, Tom Murnane, Patrick Morrison, Alex Owen,
Erik Van Der Zee.
16
About IBM Business Consulting Services
IBM Business Consulting Services (ibm.com/services) is one of the world’s leading providers of
management consulting and technology services to many of the largest and most successful organizations, across a wide range of industries. With offices in 160 countries, IBM Business Consulting
Services helps clients solve their business issues, exploiting world-class technology for improved
business performance.
17
18
To learn more about our global Financial Services practice, please visit
http://www.ibm.com/services/strategy/industries/banking.html
or contact an IBM Business Consulting Services representative.
please contact
Authors:
Shanker Ramamurthy—New York
Partner, Financial Services Practice
+1 646 598 3000
Michael S. Robinson—London
Partner, Financial Services Practice
+44 (0)20 7583 5000
Simplify to Succeed Marketing
[email protected]
19
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