Utilities & Shared services

Banking co-operatives: we’re all in this together…

Thought Leadership |

Utility strategy & execution

It’s a sharing, caring industry – isn’t it? Maybe not quite yet, but it could be…

With increasing frequency, companies within the financial-services industry are pooling resources, expertise, and capabilities to create market utilities focused on delivering specific business functions such as client services and on-boarding, trading and execution, and cash and collateral management. Why? To reduce costs, thereby freeing up valuable resources to focus on genuinely differentiating and value added products and / or services. However, setting up this type of collaboration requires executive commitment at the highest level, combined with a strategy backed by a strong operating model and effective programme governance.

 

If it’s that attractive (and that simple), why isn’t it being done more?

Although the industry has survived the financial meltdown, growth has been stymied by structural change that is coming from multiple sources: changing regulations (operational, technological, data requirements), macroeconomic dynamics within a low interest rate environment…all are driving the need for better use of available resources. How? By breaking down silos within the organisation.

 

Sounds easy, right. So how – and where – to start?

The formation of co-operative functions is no longer an option, rather a ‘must do’, creating a common set of needs in areas such as liquidity, compliance, and data sharing. Companies can tackle these needs more efficiently if they work as part of a consortium rather than on their own.

 

So, what are we talking about exactly?

We define a market utility as a multiparty commercial cooperative that fulfills a common need in a mutually beneficial way based on the capabilities that each party brings to the cooperative, and the role that each plays. Next to creating significant opportunities for cost savings, utilities differ from the internal shared-services model, which is typically focused on co-ordinating and leveraging internal resources to lower costs. Rather, market utilities are a relatively new way to solve common industry needs in areas such as liquidity, compliance, and data sharing through co-operation among multiple industry participants, thus achieving a level of scale and efficiency unattainable by any single player.

Market utilities are seen as a solution, as a way to “externalise” and “mutualise” the cost structure across a greater part of the value chain by partnering with other organisations in the industry to share capabilities and costs.

 

So, I repeat my question – how do I get started?

To position a firm correctly, executives need to carefully assess their operations, decide which functions within the organisation might be better suited to a market utility, and then decide how the organisation should participate in that utility. Utility models extend beyond traditional offshoring and cost-cutting techniques. They require a bank to religiously assess its business operations to find common features throughout the organisation and across business divisions / geographic locations that can be pooled for mutual benefit/

Market utilities can involve four types of party: industry participants, infrastructure providers, BPO service providers, and technology vendors.

 

So, where does ::projective fit in?

We can support your company to decide which utility is suitable for a given business activity by designing then executing a comprehensive check. This includes the identification of tasks that are common across the bank or other banks, which can be standardised and simplified, as well the identification of a common platform to migrate the common tasks to.

Once an executive team has decided to move a certain function to a utility, it must determine the appropriate role to play in that utility, streamline functions and processes, and adapt its whole operating model. If utilities are implemented properly, they can trigger the next wave of performance improvements in IT service delivery and operations.

Market utilities have been heralded by some as the solution to the industry’s stagnant ROE, providing a level of scale and efficiency unachievable by any single participant’s transformational efforts. However, although we believe utilities offer a massive opportunity for cost savings, they should not be thought of solely as an extension of the shared-services model. Rather, they are an opportunity to address common industry needs through cooperation and capability sharing.

As the market utility landscape develops, firms must carefully consider their own roles given the utility’s purpose, the capabilities required to make the utility successful, and the level of control necessary for the firm to execute on its own strategy. As more of the value chain comes into play and more utilities are formed, executives will need to manage a portfolio of utilities and strike the right balance of roles based on business priorities and resources.

Published by: Bernd Richter, Raymond Najm