Gartner Identifies Six Risks that Could Destroy Financial Services Institutions

Analysts Explore How to Avoid Business Killers at Gartner Symposium/ITxpo 2009, 2-5 November, Cannes, France

Cannes, France — Six “business killers” still threaten to destroy financial services institutions in the next 24 months, whether an economic upswing occurs or not, according to Gartner, Inc. These issues need to be addressed, or they have the capacity to kill the recovery for most financial-services providers (FSPs). Analysts said that those institutions that face the “business killers” head on will place themselves better to ensure that they not only survive an upturn, but to take advantage of future opportunities.

“It has been a tumultuous year for banks and financial services providers and some will continue to face a rocky path for the next two years - a critical period whenleading banks will take action to deal with both the recession and a possible recovery and thereby establish an unassailable lead over laggards,” said Peter Redshaw, research vice president at Gartner. “IT departments have been fighting frantically to help keep their organisations’ heads above water and they’d be forgiven for thinking that the worst is over. That may be true but it is no time to relax.”

Mr Redshaw, with Alistair Newton, research vice president at Gartner, and Juergen Weiss, principal research analyst at Gartner, examine the challenges that drive these killers, the opportunities they present and the actions financial services institutions need to take to thrive during Gartner Symposium/ITxpo 2009, being held here through 5 November.

While some FSPs have addressed the dangers and are now in a position to rebuild their brand and business, most others still need to confront these threats. More than 50 per cent of banks will still be in cost-optimisation mode in mid-2010 and making no plans or investments for any recovery. Gartner has identified six business killers that financial services institutions and their IT department need to overcome if they want to survive and even thrive:

1. Organisational Inflexibility and Resistance to Change
Top-down changes to governance can be initiated when senior job roles are realigned with processes and with customers - not with products or business units. Gartner predicts the emergence of roles such as a head of payments, or process improvement, or customer interactions. These are roles that are responsible at a strategic level for linking the people with the appropriate processes and systems across the FSP and at a lower level being managed on a daily, operation basis by business process management (BPM) suites.

2. Cost-Driven, Revenue-Shy
Many FSPs focus too much on costs rather than revenue as the emphasis shifts to efficiency rather than effectiveness. “For all the huge investments in IT, cost/income ratios and most other metrics have barely improved in Europe in the last ten years,” said Mr Redshaw. “Part of the problem is that every time one process is streamlined and automated, a new product or a new channel pops up and has to be supported by IT. Much of the cost improvement in recent years has been due to making lower provisions for loan losses – not a good strategy for the future. FSPs should base their targets on profitability, not just cost management.”

3. Tactics Win Over Strategy
Many FSPs focus too much on short-term thinking without having a wider strategy in place. Examples are a strong quarterly result emphasis and the lack of a coherent IT strategy. Banks miss a thorough analysis of the financial supply chain and the relevance or position of their bank within it. They also neglect supply-chain-management changes in distribution networks such as the rise of social networking and the crowd-sourcing implications. FSPs need to avoid two extremes: first, assuming that unpredictability means that strategies are worthless, so they become purely reactive and tactical; second, assuming that unlimited flexibility is a desirable state.

4. Internal Focus and Customer Neglect
Trust and confidence in traditional FSPs has been severely dented during the current crisis. Some FSPs are perceived as direct causes of current misfortunes – lost money, lost jobs, etc – and may be actively targeted for boycotts or even sabotage. However, hardly any FSPs actively offer advice to customers that is specifically designed for this recession. Instead, they devote a greater proportion of their efforts to internal initiatives designed to cut costs, make operations more efficient, shore up balance sheets and ensure regulatory compliance. The focus is inwards not outwards but FSPs should identify and work to customers’ processes rather than their own.

5. Risk: The Tail that Wags the Dog
Risk management has gained significant importance in many banks and insurers as a consequence of the financial crisis such as additional stress tests for financial institutions and informal cross-border consultations. Although the six European financial services regulations, including the Capital Requirements Directive and the Third Anti-Money-Laundering Directive, do not deliver any value to FSPs, they account for 14.1 per cent of FSPs’ IT spending. “FSPs can’t wait for instructions from regulators; ignorance is not an excuse for inactivity,” said Mr Redshaw. “New legislations should be factored in when FSPs define new products, build up new sales and service channels or decide on organisational changes; however they shouldn’t lead to a situation where the risk-tail wags the dog.”

6. Starved of Innovation
Around one third of FSPs is investing in future economic recovery but FSPs are not necessarily good at innovation. Gartner research from May 2009 conducted among 92 executives at banks worldwide showed that the most important innovation goals are to improve product or service quality, to extend a product range, to replace products and services, to comply with regulations and to protect market share. However, only 30 per cent of FSPs in North America, 53 per cent in APAC and 66 per cent in Europe have established a formal innovation process.

“FSPs must create a more outward-facing set of objectives for IT and a culture that has incorporated innovation best-practices at its core. IT strategies and projects need to be risk-aware but they also need to be innovative and bold,” said Mr Redshaw. Most importantly, IT departments at FSPs will need to support a new operating model from their board that is designed to cope with a world that has low growth, small margins, high volatility and heavy regulations.

Mr Redshaw explores the challenges FSPs face in the Gartner video at http://www.youtube.com/gartnervideo#p/u/1/30-TO4uPPfQ. Gartner analysts will further discuss the threats posed to financial-services establishments at Gartner Symposium/ITxpo 2009 in Cannes, 2-5 November.

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