Innovation and Change in a Regulatory Fishbowl

By Larry Tabb, TABB Group

Originally published on TABB Forum 

Faced with intensifying regulatory burdens and a challenging business environment, capital markets firms may find it difficult to drive meaningful change. But now is precisely the time firms need to innovate most. 

Today, large financial enterprises are bastions of siloed legacy infrastructure, held together by spaghetti code, disparate APIs and conflicting data models. In addition, post-crisis oversight means regulators are not just asking tough questions at the annual audit; they are intimately involved in day-to-day operations and tightly integrated into technology planning, development and deployment.

Innovating in this climate is like trying to run wind sprints with a 200-pound pack on your back – it’s possible, but most are exhausted by the effort, and few reach the finish line. In fact, worldwide financial services patents have reached a seven-year low, according to recent research. But this is precisely the time when banks need to innovate most. And that’s exactly why the senior financial services executives at a recent Capco roundtable are so concerned about the industry’s ability to innovate. 

Hosted by Capco partners Mark Reeves and David Oxenstierna, the discussion explored the challenges capital markets firms face in trying to create meaningful change and the various approaches to overcoming those challenges. But before firms can focus on innovating, the attendees agreed, they first need to simplify their infrastructure. 

To adapt to and succeed in today’s business environment, financial organizations need to determine a long-range strategy and an appropriate operating model, and they need to begin shedding complexity immediately. Only then, after they have shed the weight of their historical infrastructures, can firms achieve the agility required to compete. As a result of simplifying infrastructure, processing becomes more contained, data becomes cleaner, and risk becomes easier to calculate.

This operational transformation in turn provides greater enterprise visibility and empowers the organization to drive change. But firms must proceed smartly, and they need to find creative ways to fuel innovation.

Increasingly, operations and technology need to be viewed through a manufacturing-process lens. More than ever before, firms must develop a technology and service model that operates according to strict project and governance models and that allows the organization not only to commoditize the process, but to take as much variability out of the business of running technology and operations as possible. One of the increasingly popular ways of accomplishing this is through a shared, or mutual, operating model.

Although not without its challenges, a mutualized business model is gaining traction at even the largest banks. In embracing mutualized environments, it becomes critical to understand where value is added and where scale and efficiency are more important than differentiation. While each bank has its own value proposition, there is a horizontal layer within these organizations that is non-differentiated, non-proprietary, and is not a value center. The more quickly firms can locate these non-differentiating services and infrastructures and look to either outsource, share, or gain differentiating scale within these areas, the more quickly they can focus on the alpha-generating aspects of the business and embrace the change they need to grow.

Meanwhile, after years of cutting to the bone, banks looking to innovate often find they no longer have the talent in-house to make it happen. And even if they are prepared to hire, they may not find the talent they need. Increasingly, banks are competing for talent against some of the most cutting-edge firms in the world. The industry is slowly starting to embrace new products and ideas, including mobile, social and big data technologies; but attracting the best and the brightest remains a challenge

Further, although many of the event’s attendees were excited to tackle big, audacious goals, most acknowledged that up to 80 percent of their organizational resources are focused on running the bank. By determining what is core vs. non-differentiating and finding alternative solutions such as changeSourcing, an operating model that combines in-house talent with outsourced expertise, providing banks with access to strategic business and technology resources for non-alpha-generating processes, a firm not only can free resources from running the bank, it can gain change expertise, helping it to better leverage resources both within the organization and across organizations.

While the current regulatory overhang doesn’t exactly facilitate innovation, it should spur it. And the more creative firms realize that innovation needs to occur even in areas with the greatest regulatory oversight. The challenge is thinking creatively to free the resources, secure the proper expertise, and dedicate the appropriate management support to stimulate innovation. Then we can get on to tackling the big and audacious tasks that will reinvent and revive the industry.