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Creation of the Finance Factory: Financial services firms continue to cut costs through large-scale process standardization

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Robert Akam, 020 7400 4480, rakam@hanovercomms.com
Joe Eldridge, 020 7400 4480, jeldridge@hanovercomms.com
Latest issue of Capco Institute’s Journal of Financial Transformation explores industrialization in financial services and how to get this ‘right’

Financial institutions are facing myriad conflicting demands from their customers, shareholders and regulators. Customers are demanding customized solutions for the lowest possible price, investors are demanding higher returns and regulators are forcing financial institutions to meet both these objectives while remaining compliant with the ever increasing list of regulatory requirements. In order to meet these objectives, financial services firms are having to learn to manage their operations more efficiently and it is for this reason that they are being forced to look outside their own sector and to learn from their peers in the more manufacturing-orientated industries. It is this recognition of the need to act more like industrial organizations that has resulted in what many term “the industrialization of finance”.

The industrialization of financial services, which has in part been brought about as a result of the industrialization of IT systems and advances in technology, is one of the most pertinent issues facing the financial services industry and it is why the most recent edition of The Capco Institute’s Journal of Financial Transformation, has been dedicated to this topic.

A number of the more important factors that are forcing this shift to financial industrialization are covered in the latest edition of the Journal. They include:

Industrialization is here
The industrialization of financial services itself is nothing new and has in fact been taking place since the 1970s. Computers have become more than just tools to create spreadsheets: through complex pricing models they have become active market participants, executing ‘Buy / Sell’ orders and settling those trades in the market seamlessly and without human intervention. This automation has enabled industrialization.

Cost pressures lead to disconnect

However, as the market continues to develop with more complex products and structures coming to the fore, pressures to reduce costs and provide good rates of return to investors have led to a disconnect. This disconnect of complexity in the front office and commoditization in the back office was in no small way a contributory factor to the most recent economic crash. Checks and balances based on out-dated principles no longer functioned.

As the financial world emerges from the fight for its life, market participants must show their commitment to the law, remain true to regulation, ensure that customer trust is rebuilt by providing value for money and high standards of customer service and ensure that investors recoup the losses incurred.

Refining – redefining - industrialization

Thus, the approach taken for industrialization is being refined. It is now appreciated that not all processes are the same and that a ‘one solution fits all’ approach is no longer, if it ever was, appropriate. Regulatory bodies need confidence that appropriate levels of supervision are in place both internally and externally.

Firms need to become lean but not too lean. If they are too lean, they cannot take advantage of rapid increases in trading volumes. If they are not lean enough they cannot react quickly enough to changing market conditions which can lead to losses.

Successful industrialization requires end-to-end analysis

In order to industrialize processes in today’s environment, each process should be examined fully, end to end. Full analysis should be undertaken to establish the current situation. The redefinition of the ‘should be’ process needs to be undertaken in the current location, thus enabling the necessary ‘tweaks’ to be undertaken in a controlled environment once the process has reached its natural balance (all variances within the process have been established and documented). It can then be fully industrialized and moved to a cheaper geographical location if appropriate.

Running your own factory

Here are some of the questions financial institutions need to ask themselves when considering establishing their own versions of the financial services factory:

  • Will industrializing your processes still enable to you meet your customers’ requirements?
  • Will the regulatory bodies overseeing your firm allow you to industrialize your processes?
  • What financial products does your firm specialize in? Are these likely to change and will new and more complex structures come to the fore?
  • Will industrializing all of your processes allow your organization to react to changing market conditions?
  • Within your organization, is there a consistent approach for process improvement across all functions? Process improvement must become part of everyone’s daily working lives.
  • As part of industrializing process. The full process analysis and definition life cycle needs to be undertaken:
    o Establish current situation
    o Define ‘Should Be’ process
    o Implement the revised process
    o Control and document the revised process

These issues are covered in greater detail in the latest issue of The Capco Institute’s Journal of Financial Transformation, in which authors explore the topic of industrialization in relation to technology, the financial crisis and risk management, among others.

Notes to Editors
The Journal of Financial Transformation is the only professionally focused scientific journal in finance to be accredited by the American Economic Association and is among the 20 journals recommended by the European Finance Association. The Journal, celebrating its 10th anniversary this year, has received the APEX Award for Publication Excellence every year since 2002 and has had contributions from 20 Nobel Laureates. The Capco Institute, which publishes the Journal, is ranked among the world’s foremost research institutes by the Social Science Research Network.

About Capco
Capco, a global business and technology consultancy dedicated solely to the financial services industry. Our professionals combine innovative thinking with our unrivalled first-hand industry knowledge to offer our clients consulting expertise, complex technology and package integration, and managed services to move their organizations forward.

Through our collaborative and efficient approach, we help our clients successfully increase revenue, manage risk and regulatory change, reduce costs and enhance control. We specialize in banking; capital markets; wealth and investment management; finance, risk & compliance; and technology. We serve our clients from offices in leading financial centres across North America and Europe. To learn more, visit our web site at capco.com.

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