Optimization is vital for Capital Markets firms, contributing to their operational effectiveness, improved risk management, cost reduction, and increased profitability. While there is no one-size-fits-all optimization solution, Capco’s ‘Optimize’ framework challenges the traditional approach of delivering transformations.  We enable business divisions to embed self-sustaining improvement and innovation by leveraging an integrated suite of services, linked to priorities measured through objectives and key results.

As of early 2024, the ongoing economic uncertainty, persistent inflationary environment, elevated interest rates, and elevated shareholder pressures have significantly impacted the cost of doing business, driving firms to optimize. Each year, banks cumulatively spend approximately $1.4 trillion to run their front-to-back functions.¹

Getting optimization right is never an easy undertaking, and it embeds several strategic and tactical change initiatives.

The focus of this article will be the first element – Strategy – of our ‘Optimize’ framework. We will explore the other elements in future articles.

How Strategy Fits Within the Optimize Framework

The conventional top-down approach for optimization initiatives involves defining and addressing disjointed priorities. Employees at different organizational levels often struggle to relate to those priorities, and our ‘Optimize’ approach addresses this by engaging participants across the firm to build a holistic strategy to specific, targeted change campaigns. 

Our approach is guided by metrics tied to overall business objectives, which we regularly communicate and measure to ensure meaningful results across the organization. We provide a comprehensive set of strategy offerings to highlight key choices and prioritize efforts so clients can move forward with confidence and accountability:

• Executive strategy definition – unlock strategic imperatives and identify impactful business optimization levers
• Operating model design – build target operating models that translate into practical implementation
• Implementation roadmap – construct and monitor integrated delivery plans across stakeholder groups
• Communication and Engagement – design organization-wide multichannel campaigns to capture hearts and minds.

Strategic Trends That Can Unlock Optimization Benefits

We have identified several key trends to drive optimization efforts. 

Lean Operating Model. Capital markets firms explored various opportunities to employ leaner operating models including automation via low/no-code platforms and generative AI tooling opportunities.

Low-code/no-code platforms enable greater agility and mobilize all levels of the firm in collaborative campaigns so banks can nimbly respond to changing customer needs and market demands. These platforms are cost-effective because they require fewer coding resources and expertise, resulting in lower strain on corporate IT teams plus faster application prototyping and development. Some industry examples include: 

• Bank of America, BNY Mellon, and Citi invested $20 million in Genesis Global, a low-code application development platform specifically built for capital markets²
• JP Morgan created a centralized developer platform (JPMC Enterprise Toolchain) to better identify and reuse relevant existing code and autonomously generate repeatable software testing.³

Leveraging generative AI tooling can open opportunities to streamline operations across the firm while delivering enhanced end-user outcomes. To effectively deploy GenAI, firms must determine focused use cases through engaging the entire firm. For example, any opportunity to improve traders’ communications and operations requires front, middle, and back-office teams plus IT to participate in the optimization journey as the solution brings cascading operating model benefits for all functions involved. 

• FIS uses C3 AI, a comprehensive enterprise AI application development platform, to aggregate and analyze institutional client data to enhance KYC processes⁴
• Santander, Wells Fargo, Bank of America, and others launched their own respective AI chatbots to augment employee capabilities, creating prediction patterns to enable well-informed decisions to meet corporate client needs.⁵

For further insights on the GenAI opportunities for Capital Markets, please see this article.

Cost Transformation Trends. As Capital Markets firms seek to reduce costs, strategic intent behind the spending can be overlooked and important investments are often sacrificed. Therefore, a comprehensive strategic approach to cost transformation is required.

Workforce optimization initiatives help firms keep pace with changing business needs, market conditions, and required skillsets. These initiatives improve employee efficiency by enabling firms to access the talent they need in an agile, cost-effective way. It offers opportunities to increase collaboration, improve employee retention, and enhance productivity in preparation for the future of work. Industry examples include:

• Capital One, Deutsche Bank, HSBC, and other banks are embracing hybrid organization models to drive staff retention and workforce productivity by allowing flexible hours and change of environments that improve employee’s focus, job satisfaction, and use of time^6,7,8
• First Citizens Bank’s recent acquisition added offshore-based talent to their overall workforce, reducing labor costs whilst providing opportunities to tap into new markets ⁹
• DBS launched an in-house digital training institute to keep its technology workforce updated with skills in Artificial Intelligence and Machine Learning, cybersecurity, cloud, blockchain, etc.¹⁰

Cloud Computing. Transitioning to cloud is a prominent enabler for Capital Markets firms to achieve business outcomes while offering cost takeout opportunities. It provides the scalability required to analyze large volumes of data critical to daily decisions on balance sheet and capital management. It also offers opportunities to consolidate legacy architecture and operating aspects around data creation, management, and retention. Industry examples include:

• Bank of America saves over $2 billion a year since building its own cloud¹¹
• FINRA moved all technology to the cloud, reducing annual expenses by $100+ million and allowing them to process hundreds of billions of market records and transactions¹¹
• Santander reduced energy consumption by 70% since shifting to the cloud¹²

Cybersecurity: The annual cost of cybercrime is projected to hit $10.5 trillion by 2025, and a 2023 study identified 74% of financial institutions experienced a ransomware attack.^13,14 Applying an integrated ‘Optimize’ approach to the root cause of cyberattacks can offer lasting benefits while also facilitating cost efficiencies.

• Cyber security spending as a percentage of firms’ overall IT spending continues to increase, with capital markets firms allocating an average of 13.6% of their IT budget in 2023¹⁵
• Citi and other investment banks noted a rising demand for workers with cyber skills; in the US, there are 2.6 cyber job postings per cyber professional¹⁶
• Goldman Sachs invested $125 million in Fortress Information Security (Fortress), a leading supply chain cybersecurity provider for corporate and institutional clients.¹⁷
  
  

Strategic Considerations for Optimization Opportunities

Here are some key questions Capital Markets firms should ask as they determine the way forward with Optimization efforts:

• What are your Optimization vision and goals? Capital markets firms should confirm their long-term financial and non-financial goals and evaluate their multi-year vision for Optimization efforts. 
• Where to play and how to assess Optimization focus areas? Firms should engage across the organization to define a campaign prioritization framework based on (a) desirability, (b) viability and (c) feasibility. The prioritization exercise will enable firms to make difficult decisions on where to focus their limited resources and time.
• What benefits will Strategy & wider Optimization deliver? Firms must consider and prioritize the benefits of change, including reduced cost, revenue growth, operational efficiency, and client & employee experience. 
• How to win? Firms should closely monitor Optimization initiatives, rapidly mobilize to achieve quick wins, and build structure to enable sustainable innovation to achieve their long-term vision.

Optimization initiatives offer Capital Markets firms a prime opportunity to compete and separate themselves in the current business environment focused on lowering costs and boosting returns on investment. Capco’s proprietary ‘Optimize’ approach offers firms the chance to implement focused change campaigns in targeted segments to best address their individual needs and goals.

If you have any questions or wish to learn more about Capco’s “Optimize” framework, please reach out to us using the form below.

References:

¹ https://www.infosysbpm.com/blogs/banking/banking-cost-reduction.html
² https://www.fi-desk.com/low-code-specialist-boosted-by-bank-of-america-bny-mellon-and-citi-20-million-investment/
³ https://www.jpmorgan.com/technology/technology-blog/driving-enterprise-software-delivery
⁴ https://www.fisglobal.com/en/products/fis-credit-intelligence#:~:text=FIS%C2%AE%20Credit%20Intelligence%20with,and%20visualize%20your%20loan%20portfolio.
⁵ https://www.spglobal.com/en/research-insights/featured/special-editorial/ai-in-banking-ai-will-be-an-incremental-game-changer
⁶ https://www.capitalonecareers.com/a-hybrid-work-model-at-capital-one-101
⁷ https://www.db.com/who-we-are/our-culture/hr-report/future-of-work/hybrid-working-model
⁸ https://www.bloomberg.com/news/articles/2021-09-02/hsbc-ceo-plans-for-permanent-hybrid-work-much-less-jet-setting
⁹  https://www.axios.com/2023/05/24/scoop-first-citizens-lays-off-almost-500-silicon-valley-bank-employees
¹⁰ https://www.dbs.com/media/upskilling-reskilling/upskilling-and-reskilling-for-a-future-proof-workforce.page
¹¹ https://www.nytimes.com/2022/01/03/business/wall-street-cloud-computing.html
¹² https://www.santander.com/en/press-room/press-releases/2022/05/santander-digitalizes-its-core-banking-with-cloud-technology-to-improve-service-and-efficiency
¹³ https://www.vmware.com/content/dam/learn/en/pdf/carbonblack/Modern Bank Heists 5.0 Report.pdf?mkt_tok=MDQ4LVNaVy0wNDUAAAGKyNDvle35XYCxY1n4iGwnsQ-7KAAyP8VVZikjNXhICianQYPZuVH_yhbldLuQfKCMApjUyT_BOfCnjcj7qVY7oomWVdFl2HgYbTTPWZgUq98cNqzU
¹⁴ https://www.forbes.com/sites/forbestechcouncil/2023/02/22/105-trillion-reasons-why-we-need-a-united-response-to-cyber-risk/?sh=35a78eab3b0c
¹⁵ https://www.wsj.com/articles/cybersecurity-in-the-year-ahead-think-2023-on-steroids-ab711f4e
¹⁶ https://www.citigroup.com/global/insights/citigps/the-cyber-problem
¹⁷ https://www.darkreading.com/cybersecurity-operations/fortress-information-security-receives-125m-strategic-investment-from-goldman-sachs-asset-management