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Accenture Top10 Challenges 2011
Accenture Top10 Challenges 2011
2011
for Investment Banks
Top 10 Challenges
Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks 2011
Introduction
Navigating Through
Uncertainty
With leverage no longer an easy option
to drive returns on equity, and
proprietary trading now seen as risky by
both regulators and shareholders alike,
investment banks are faced with the
difficult task of identifying new ways to
propel their returns on equity back to
something close to pre-crisis levels. In
such an uncertain operating
environment, assessing risk, making the
most of existing revenues, and
capitalising on new opportunities have
never been more important.
Introduction: Navigating Through uncertainty
10 US
EU
Emerging & Developing economies
8
-2
-4
-6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
20
Source: IMF, World Economic Outlook Database, April 2010
1.Demographic challenges
Widely reported, most developed
economies are struggling to come to
terms with seismic demographic
challenges. To varying degrees, these
No surprise that investment banks are are set to transform the way people
still scrambling to adjust to the realities live and work. Life cycle savings
of this new normal. In a straitened and ageing populations point to the
operating environment where the only need to save in developed economies,
certainty is increased regulation, making asset management an
pre-crisis returns on equity (RoE) of, increasingly vital source of revenue
on average, 20 percent look extremely growth for investment banks.
optimistic.
2.Emerging markets growth
As banks seek to identify (and exploit) Economies experiencing rapid growth,
every revenue opportunity, they need combined with little well established
to ensure a rigorous focus on strategic competition, offer exciting
and operational priorities. If they do opportunities for investment
not, they risk undertaking a series of banks. But the risks, and operational
broad-based transformations that challenges, of expansion into these
achieve little other than squandering new geographies are still being
precious resources and dulling potentially underestimated.
competitive edge.
3.Technology commoditisation
To help achieve the focus that we Technology has repeatedly
believe is essential to high demonstrated its ability to
performance, Accenture has developed commoditise banking offerings
a list of the top ten challenges facing particularly in non-relationship based,
investment banks today. Although low value added areas. With
these may not apply to all with equal commoditisation increasingly
weight, each represents a major dominating flow businesses, clear-
concern (and source of opportunity) sighted strategic decision-making is
for the industry going into 2011 vital. Banks must either make the
and beyond. substantial investments in straight-
through processing capabilities
Fundamental macro trends needed to achieve economies of scale,
As they face up to the challenges that or concentrate on areas such as
lie ahead, investment banks need to advisory, that cannot be
keep the following six macro trends commoditised.
front of mind. Each of them, we
believe, will play a crucial role in
shaping the future operating
environment:
4. Ultimate value to investors Investment banking three themes Driving the client agenda
Investment banks have to concentrate for the future With proprietary trading operations
on services and offerings where they With these macro trends in mind, we being limited by regulators and
deliver value to their clients, not just have divided the challenges facing questioned by shareholders, the
margins to themselves. This makes it investment banks into three broad importance of building (and
essential for banks to develop deep, themes: maintaining) a successful client
real-time insights into the risk/reward franchise is now critical to the
balance of their products and services. Responding to regulation bottom line. So too is the need to
Of course, banks must still take risks drive greater efficiencies from
5. Re-evaluation of capital to achieve their targeted RoE, but existing revenues. From now on,
Savings deposits may be the most they must now do so through a banks must focus on providing
desired form of capital, undemanding complex (and still evolving) integrated client services to attract
and sticky, but those attributes also regulatory framework. Beyond and retain client business, as well as
make it rare and likely to become rarer. question, responding to the post- developing the deep analytical insight
Investors have many more choices on crisis wave of regulation presents a needed to monitor and maximise
where to place their capital and the major compliance challenge for all client returns, and undertaking
amount placed in savings has been one investment banks although new realistic assessments of the costs and
of the slowest growing of all areas for opportunities will be created from the benefits of the services that they
over a decade. With this in mind, market dislocation that is already provide. As figure 2 shows, the results
investment banks need to re-evaluate underway. From now on, robust risk of this discipline will allow them to
capitals importance in any service of management will be a crucial pinpoint where to invest to achieve
product and charge accordingly. demonstration of intent to regulators, economies of scale, and where to aim
as well as allowing banks to shape for high-touch differentiation.
6. Resource constraints regulation and protect shareholder Lastly, now more than ever, by taking
Mounting resource constraints point to value. If one lesson can be taken sustainability seriously, they
gradually rising input costs becoming a away from the crisis, it must be that have an opportunity to regain trust
universal backdrop to all business and previous risk governance models were (amongst clients and throughout
banking activity. With oil approaching largely inadequate to shield wider society), while delivering
peak output, and basic commodity costs investment banks from the onslaught returns to their core business through
responding to wide demands of of systemic turmoil. Going forward, responsible business practices.
emerging markets, a reordering of therefore, banks must commit to
economic priorities looks to be the likely adopting and embedding a culture of
result. Sustainability is now on the managing risk throughout the
agenda (as a serious business issue) organisation (particularly in the
across all business sectors and front office).
investment banks must overcome their
institutional cynicism and follow suit
(as well as capitalise on the
opportunities presented).
Figure 2: Effective Targeting of Client Offerings
Value of Client
Banks can find new revenue through effectively
segmenting clients and determining where value is delivered Access
Realistic assessment of cost and benefits of services need to Core
to be undertaken
Marginal Value of Provision
clients
High Touch
Access to Analysts
Low Touch
Broker reports
James Sproule
London
[email protected]
+44 20 7844 3387
+44 78 6680 8366
Introduction: Navigating Through uncertainty
1 Responding to the
Regulatory Tsunami
3 Embedding Effective
Risk Management
4 Refocusing on Client
Needs
5 Maximising Client
Profitability
6 Taking Sustainability
Seriously
7 Delivering Valuable
Transformation
8 Harnessing Innovative
Technologies
9 Engaging Effectively in
Emerging Markets
1 Responding to the
Regulatory Tsunami
Fears in the financial services sector
of a drastic increase in regulation at
a national and supra-national level
have been realised. With so much
game-changing oversight being
introduced, it is increasingly difficult
for investment banks to ensure
complete compliance while
continuing to make money in an
uncertain market.
Challenge 1: Responding to the Regulatory Tsunami
Living Wills /
Volcker Rule Orderly Liquidation
Banking Requirements
Challenge 1: Responding to the Regulatory Tsunami
Our perspective
Enabling a continuous cycle of risk and
control enhancement
Regulatory change is notoriously
difficult for investment banks to
implement. In large part, this is because
the timescales are immovable
something that banks find extremely
difficult to work with. In fact, the only
variable that banks can change is the
budget available for regulatory projects.
And in our experience, throwing money
Figure 4: Regulation-related costs over three years at the problem is commonplace, with
projects often running at least two to
Discipline Costs (US$m) FTE (per year)
three times over budget.
Data 90 90
Finance 230 280
According to our estimates, over the
Risk 260 360
past three years an average bank will
Operations 200 290
have spent up to $900 million on
Technology 120 115
regulatory change-related programmes,
Total 900 1135
as well as tying up huge numbers of
Source: Accenture research
resources. With such large numbers at
stake (see figure 4), poor delivery can be
very costly indeed.
Challenge 1: Responding to the Regulatory Tsunami
The problem is that the current wave of With a delivery methodology specifically
regulation is bringing several regulatory designed for strategic regulatory and
programmes of this scale together at operational implementation across
the same time. More than ever, banks financial services organisations, we
need to ensure that they fully enable banks to create, develop and
understand the new regulations and the deploy new governance structures, risk
effect on their business. and control frameworks and processes
for ongoing monitoring and
effectiveness assessments. As well as
satisfying regulators demands for
ongoing oversight, these structures and
processes inject discipline and rigour
into the change process.
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Chris Thompson
Senior Executive, New York
[email protected]
+1 917 452 4986
+1 917 378 1409
Peter McCloskey
London
[email protected]
+44 20 3335 0876
+44 77 4079 9130
Samantha Regan
New York
[email protected]
iSource: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?,
+1 917 452 5500
June 2010) +1 404 790 7378
iiSource: Basel Committee Press Release
(BIS, September 2010). Note = capital ratios refer to
proposed ratios as of 1 January 2019, and are subject to
phase-in arrangements. Proposals are draft and are
subject to ratification by national authorities.
iiiSource: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?,
June 2010)
ivSource: Accenture
(US Financial Services Regulation Survey, June 2010).
N=102 (33% C-suite, 20% VP/SVP/EVP, 24% MD/Director,
24% Senior Manager/Manager)
Top 10 Challenges
for Investment Banks 2011
Background
Reforming the maligned derivatives industry
Although the end-state of the OTC derivatives market following
this major regulatory thrust is still unclear, there is no questioning the
commitment to major reforms on both sides of the Atlantic
Accounting for 90 percent of the global In July 2010, President Obama signed
US$605 trillionii derivatives market, the into law the Dodd-Frank Wall Street
over-the-counter (OTC) derivatives Reform & Consumer Protection Act.
market was widely viewed as a catalyst This introduced an extensive set of new
of the financial crisis. Light on both risk regulations that focuses on both
mitigation and risk management, it is reducing counterparty risk and
blamed for facilitating the build-up increasing transparency. The Act
of excessive exposures, as well as mandates the establishment of a new
operational inefficiencies, complexity regulatory structure, limits on
and an overall lack of market proprietary trading and the reshaping
transparency. of regulation on swaps trading
(including the spin-off of certain swaps
trading operations into separately
capitalised businesses). Amongst other
consequences, the Act may have a
negative impact on capital efficiency,
as well as significantly reshaping banks
operating models to ensure greater
market transparency and reporting.
Challenge 2: Dealing with OTC Derivatives Reform
Regulation Implications US EU
Central Clearing Financial Companies to centrally clear swaps Liquidity demand of high initial margin
(grandfathering of existing swaps) Daily variance margin
Exception: Non-financial companies Cash form of margin
(end-users) exempt
Exchange Trading All standardised swaps to be exchange-traded, Inability to customise (important for hedging)
where an exchange/ASEF exists Standardisation of swaps
Exception: Non-financial companies Increasing volumes
(end-users) exempt
Capital Requirements Conservative requirements for dealers and Increasing trading costs
major swap participants for cleared swaps Increased focus on efficient capital allocation
Higher capital requirements for dealers on
OTC positions
Post-Trade Reporting Real time price and volume reporting Price transparency
(T+1 for OTC) Standardisation of swaps
Existing swaps also to be reported Reporting infrastructure implications
Overseen by CFTC/SEC in US and new
ESMA/ESRB in EU
External Positioning
The priority here is to develop a focused
business response to the fundamental
market change brought about by the
Dodd-Frank Act. The consequences of
the Act are still to be fully understood
within the industry, though the need to
clear OTC derivatives through central
counterparties (CCPs) indicates that this
topic alone will demand strategic
thinking at the C-suite level of
investment banks.
Note: Illustrative only. Relative shares of revenue source will vary by Investment Bank.
Challenge 2: Dealing with OTC Derivatives Reform
Internal strengthening
Investment banks must ensure a rapid
response to developments being driven
by regulators (including greater use of
electronic execution, mandatory use of
CCPs for all eligible products,
Strategically, banks are deciding registration of all trades in central data
between two key responses to the depositories and enhanced risk
market changes: whether to develop management). Particular areas for
clearing capabilities or outsource this attention include:
service to third party providers.
Upgrading ageing and inflexible
Building clearing capabilities opens up legacy applications to increase system
the market opportunities of offering a capacity that will enable growth
full service to clients across both under a new market infrastructure
execution and clearing, or acting purely
as a clearing broker for those clients Understanding the complex change
that opt to execute their trades with in operations needed to address the
other market players. This latter shift of various asset classes onto
response seeks to capitalise on the exchanges and electronic trading
market dislocation and the creation of venues for subsequent clearance
what is effectively a new market for and settlement of CCPs
derivatives clearing services. These
services include clearing access, cross-
margining, multi-asset risk
management, and client reporting. For
those banks unwilling to develop these
capabilities, outsourcing the clearing
process to a third party provides a
viable option to staying in the market
whilst stopping short of investing in
capabilities that will deliver a full
service to clients.
Front-office Systems Integrate with new market models More change whilst BAU (Business
as they evolve and with downstream As Usual) continues to add complexity
applications
Trade Capture/Booking Multiple affirmation & matching Uncertainty around which trade venues,
system connectivity matching venues and affirmation
platforms and clearing houses to support
Pricing & Valuations Use in-house derived prices for Different exchanges will close at
valuations or EOD (End of Day) different prices though a standardised
exchange prices (exchange arbitrage) approach across the bank must
be implemented
Margin Calculation & Collateral Listed products vs OTC who Process split between Prime Brokerage
will reconcile the collateral calls and OTC
and margins?
Client Reporting CCP model increases collateral activity Strain on legacy processes as trade
and valuations volumes increase and clearing specific
information is required, including trade
level detail to align with CCP reporting
Settlements Multiple clearing house methodologies New processes and controls need to be
designed and integrated
Product Control Clear handoffs between Product Control New processes and controls need to
& Finance required be designed and integrated
Credit Risk Management Managing all the moving parts new Co-ordinated effort required to leverage
collateral types, ISDA agreements, inflexible legacy applications
individually-negotiated Netting rules
Finance & Accounting Balance sheet reporting Controllers need to clearly define
reporting flows for Agency vs Principal
trades, as this has a direct impact on
upstream business and technology
processes
Risk finance integration How will banks update their models and
ensure that market risk is integrated at
the point of execution for OTC client
cleared trades?
Confirmations and Documentation BAU or new process Modification of existing controls and
processes required to preserve straight
through processing
Fees and Billings New reconciliation requirement One size fits all approach isnt viable
flexible rules & tables, legacy
applications
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Dean Jayson
Senior Executive, London
[email protected]
+44 20 7844 8295
+44 79 5841 4692
Anastassia Khomenko
Paris
[email protected]
+33 1 53 23 61 85
+33 6 32 27 08 90
Ben Shorten
London
[email protected]
+44 20 7844 7212
+44 77 3661 0252
3 Embedding Effective
Risk Management
Regulatory demands for enhanced risk
management are now a fact of life for
investment banks. However, instead
of adopting reactive approaches to
these demands, more fundamental
reappraisals of enterprise risk
management (ERM) are needed. Until
joined-up ERM cultures are embedded
throughout the organisation, the
business value that can and should be
generated from substantial risk-related
investments will not be realised.
Challenge 3: Embedding Effective Risk Management
Background
Moving towards true enterprise-wide risk
management awareness
Although multiple tools have been developed to address identified risks,
these are still far from integrated.
However, while investment banks are Figure 1: Expected strategic responses to proposed regulatory reforms
only too aware of the disconnect
between front-office risk management Tighten risk management 54%
and back-office risk control, the Implement cost reductions 44%
challenges that must be overcome on Change pricing structure 39%
the road to joined-up, enterprise-wide Focus more on core competencies 31%
risk management are substantial. Launch new product or service lines 29%
Enter new market or customer segments 28%
Implement change management program 26%
Divest business or geographic units 25%
Decrease Headcount 24%
Merge or acquire other companies 21%
Launch new business or geographic units 20%
Increase headcount 18%
Shut down product or service lines 16%
Relocate headquarters or business unit locations 10%
No strategic change 5%
Other 1%
0% 10% 20% 30% 40% 50% 60%
AONs Global ERM Survey 2010 Beyond the behavioural level, challenges
identifies four high-level challenges: abound in the storage, management
Lack of skills necessary to embed and analysis of data. Specifically, how
ERM (according to 34 percent can investment banks meet the
of respondents) requirements of the various consumers
Lack of senior management of risk management information in their
sponsorship (31 percent organisation? This means confronting
of respondents) a number of issues, including:
Lack of any clear implementation
plan (28 percent of respondents)
Failure to communicate the case for
change (27 percent of respondents)
Source: Accenture (US Financial Services Regulation Survey, June 2010). Source: Accenture (US Financial Services Regulation Survey, June 2010)
FF FF
Challenge
Challenge
3: Embedding
3: Embedding
Effective
Effective
RiskRisk
Management
Management
Collaboration decision-makers
across the business must have
access to appropriate risk metrics so
that risk management can be
included in all decisions
Internal controls rather than
resenting the constraining effect of
Our perspective
risk management programmes, it is
Truly mature ERM demands a proactive important that managers must
recognise these as enablers of
approach from the organisation. business objectives
Individual and organisational goals
ensuring that individuals needs
As investment banks move towards are aligned with the wider needs of
embedding enterprise-wide risk the business, especially through
management, Accenture believes their compensation structures
approach must embrace Culture & Performance measures defining
Performance, Risk Functions and pragmatic measures that
Leading Practice. acknowledge risk taking and problem
prevention, balancing future goals
Culture & Performance with an effective early-warning
The traditional view of risk management system.
as policeman or second line of
defence must be continually
challenged. The objective must be to
replace this outdated view with deep
enterprise-wide collaboration and
feedback loops that reinforce proactive
discussion and implementation.
The following stand out:
Challenge 3: Embedding Effective Risk Management
Risk Functions
The Risk departments traditional
functions data gathering, reporting
and analysis must be subjected to
constant review. This should focus
on a number of priority areas:
Risk Culture
Working with the board down, the Systems and Technology
Regulatory Compliance
Accenture team introduced
industrialised real-time reporting,
aiming to equip decision-makers with
relevant metrics that could be trusted to
provide accurate insights.
Challenge 3: Embedding Effective Risk Management
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Steve Culp
Senior Executive, London
[email protected]
+44 20 7844 4855
+44 77 7581 8701
Ashley Davies
London
[email protected]
+44 20 7844 0058
+44 77 6850 5950
Takis Sironis
London
[email protected]
+44 20 3335 0457
+44 77 4094 9497
4 Refocusing on
Client Needs
Driven by shareholder demands and
regulatory pressure, investment banks
are going back to basics shifting the
emphasis from complex product
innovation towards increased client
intimacy. The priority now is to better
align service offerings with clients
needs a significant challenge for the
majority of banks that have neglected
client service-based investments in
recent years.
Challenge 1: Responding to the Regulatory Tsunami
Key challenges
Investment banks need to integrate their
client strategy across regions, business units
and channels
In recent years, most investment banks This strategy shortfall extends to
have neglected investments in their channel considerations. Unlike their
client service offerings. As a result, counterparts in the retail-banking
many of them are struggling to develop sector, many investment banks have yet
greater client intimacy by better to develop cohesive channel
aligning service offerings with management strategies that integrate
client needs. voice, face-to-face, electronic and self-
service channels. Defining entitlement
Based on our experience, we see banks and service levels across channels (by
facing systemic difficulties in four major client segment and priority) are critical
areas: in ensuring clients service expectations
are met profitably.
Client Strategy
Many investment banks lack an Many investment banks also still lack a
integrated client strategy spanning consistent and complete set of metrics
regions, business units and products. for managing the sales organisation.
Hampered by siloed departmental Without this there is a lack of common
structures, they are struggling to meet and truly effective incentives to
mounting client demands for uniform promote client focus and greater levels
service levels across geographies and of cross-selling.
product segments. Additionally, because
few banks have a deep understanding of
client profitability, most of them are
unable to assess their clients true value
to the bank meaning that they
continue to over-serve and under-value,
as well as failing to manage the long
tail of unprofitable clients.
Challenge 4: Refocusing on Client Needs
Our perspective
Embedding top-down commitment to the
new strategy
Developing an integrated Flexibility is key. The integrated client
client strategy strategy should not inhibit a degree of
Only an ambitious client strategy that local adaptation, nor should it prevent
covers the banks regions, client product desks from developing their
segments and product areas can deliver own client prioritisation criteria. Instead,
on the crucial objectives of integrated the strategy should provide an
and consistent service delivery, deeper overarching framework, creating a
client insights and improved client common purpose while enabling
penetration. Any drive towards this goal individual product areas to maximise
must start at the top with committed their own revenue potential.
senior-level engagement. At large
banking groups, consideration should be
given to whether or not to extend the
investment bank client strategy to
The client strategy, often group level. But any decision to do so
best led by a Head of Client must not be taken lightly even leading
banks have struggled for years to make
who is not product aligned, this work effectively.
must mesh priority client
segments with overarching The client strategy, often best led by a
Head of Client who is not product
product and channel aligned, must mesh priority client
strategies. segments with overarching product and
channel strategies. This approach needs
to consider access levels to advisory
services, and other premium services
by segment.
Challenge 4: Refocusing on Client Needs
Benefits delivered
As well as enabling the bank to segment its
client base and vastly improve its
understanding of clients cross-product
requirements, this project also meant that
In practice the banks change portfolio could be
mapped against a refreshed target
Enabling enterprise-wide client insight operating model.
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
James Woodhouse
Senior Executive, London
[email protected]
+44 20 7844 4415
+44 78 3623 3985
Cathinka Wahlstrom
Senior Executive, New York
[email protected]
+1 917 452 5897
+1 917 414 1055
Robin Martin
London
[email protected]
+44 20 7844 6464
+44 77 3914 2895
5 Maximising Client
Profitability
Facing reduced leverage and with
proprietary trading revenues in decline,
investment banks are refocusing on
client business. In this environment,
increased client profitability will prove
crucial to achieving pre-crisis levels of
profitability.
Background
Investment banks will increasingly depend
on client business to generate profits
There is mounting pressure on leverage and proprietary trading
two of the principal pre-crisis drivers of profitability
1500%
1000%
500%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Key challenges
Most banks have only limited understanding
of client value
Improved client profitability will be key The challenge is considerable. Accenture The causes of these inter-desk variations
to replacing those revenues previously analysis of a sample of three leading typically differ from bank to bank. That
derived from high leverage ratios and investment banks showed that: said, differences in client types
lucrative proprietary trading desks. (corporate vs institutional), desk-level
Clearly therefore, a key challenge facing 20 to 50 percent of clients in those client data sophistication and
investment banks is that of how to organisations were unprofitable; technology maturity are all common
increase client revenues whilst reducing 10 percent of clients generate over explanations. Each points to an urgent
client cost-to-serve. 80 percent of revenues, on average; need for tailored client servicing
very significant variations in client requirements by desk. It should,
profitability exist between desks. however, be noted that where clients are
trading cross-asset, client profitability
should be viewed holistically, at an
Figure 2: Illustrative Client Revenue Segments enterprise level.
Erode value;
Erode revenues
value; below
revenues breakeven
below threshold*
breakeven threshold*
Challenge Solution
Salespeople will be incentivised to propose their clients The approach to managing client prospects needs to be addressed in a holistic
in higher value segments to ensure the best service for fashion, to avoid the distorting effects of incentivisation. Revenue targets for the year
Sales
their clients, and potentially secure higher sales need to be agreed and monitored, and Sales staff remunerated not only on sales credit
Incentivisation credits/remuneration for themselves. achieved, but also on meeting pre-agreed sales targets. Senior Sales
management should sign off the assignment of clients to segments.
In determining client profitability, a number of cases A comprehensive exception methodology needs to be developed as part of the governance
for exceptions are likely to emerge. For instance, for client segmentation. Prior to offboarding clients, a number of mandatory checks
Managing a client may be unprofitable at the investment bank should be performed to confirm that there is no profitable relationship with another
Exceptions level, but have a highly profitable relationship with the business line or client entity that could be jeopardised.
corporate banking division that may justify maintaining A robust methodology should be in place, providing clear guidance on how to approach
relationships. such exceptions.
Banks may question the reputational benefits Clients should be made aware of the client offerings at each segment level, including
(and costs) of client segmentation, particularly when an articulation of the benefits of consolidating broker spend and moving up the segment
Incentivising competitors may be less sophisticated and operate ladder. The offboarding process should be kept confidential, and should be executed using
Clients without segmentation. It is therefore important to be the soft-boarding approach outlined above to avoid any negative impact on clients.
aware of the carrot as well as the stick for clients.
Whilst boosting top-line revenues by incentivising As part of the offboarding process, exact targets for cost reduction must be identified
increased client share-of-wallet, there is a risk that and delivered upon. For example, if KYC and credit check costs are identified as a key cost
Realising Cost banks do not complete the process by realising cost saving from offboarding unprofitable clients, then actual savings must be realised in these
Savings savings from offboarding and industrialisation. departments to deliver the overall profitability benefits. Similarly, industrialisation
programmes for the low-value segment will require a reorganisation of Sales staff to
deliver tangible cost savings.
Challenge 5: Maximising Client Profitability
Benefits delivered
A global investment bank engaged Accenture presented the client with
Accenture to help it understand client a clear view of its client portfolio across
profitability, recommend quick-win asset classes, and a reusable tool for
solutions and develop a roadmap for the consolidating client revenues and costs
strategic optimisation of its client base across desks and systems. The analysis
to enhance profitability across asset confirmed managements hypothesis
classes. Although this client had a concerning the large tranche of
limited understanding of its client base, unprofitable clients, and went on to
management believed that the bank was quantify the optimisation opportunity.
serving a large tranche of unprofitable The project team prepared a robust
and low-value clients. proposal and roadmap for client
segmentation, along with a business
The Accenture team initially focused on case for carrying the project through
investigating the current state of client to delivery and realisation of client
profitability, developing a light-touch profitability enhancement.
methodology that would be readily
accepted by sceptical Sales and Trading
stakeholders. This involved agreeing a
minimum acceptable breakeven point
for a profitable client based on known
client costs of annual KYC, credit check
and attributed sales costs.
Challenge 5: Maximising Client Profitability
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Joakim Mellander
Senior Executive, New York
[email protected]
+1 917 452 2267
+1 917 539 9266
Thomas Syrett
Paris
[email protected]
+33 1 56 52 71 20
+33 6 83 66 03 80
iSource: JP Morgan research note
iiSource: City Fios:
Ronan OKelly
http://www.cityfios.com/pdfs/City_Fios_Standard_Bank_ London
Case_Study.pdf [email protected]
iiiSource: Accenture Research, June 2009
ivSelected Banks = HSBC, Bank of America, JPMorgan, +44 20 7844 0155
Citi, BNP Paribas, ING, Goldman Sachs, UBS, Socit +44 79 4671 2749
Gnrale, Deutsche Bank, Barclays, Credit Suisse, Credit
Agricole, Morgan Stanley, Merrill Lynch, RBS, Standard
Chartered, RBC, Bank of Montreal, Bank of Nova Scotia,
CIBC, BBVA, Unicredit; Top 5 Banks = Goldman Sachs,
UBS, Morgan Stanley, BNP Paribas, Merrill Lynch). Note:
Merrill Lynch figures are to 31 December 2008 and are
incorporated into Bank of America figures thereafter.
vSource: Deutsche Bank, company filings and
presentations, Accenture analysis; sum of revenues at
risk at BAC, JPMC, GS, MS, Citi assuming range of 2-10%
2009 core trading revenues derived from proprietary
trading.
Top 10 Challenges
for Investment Banks 2011
6 Taking Sustainability
Seriously
Although investment banks direct
environmental footprint may be
minimal, their ability to influence the
economywide footprint is unparalleled.
Aside from the direct reputational
benefits; advances in technology,
increasing environmental regulation
and, most importantly, customer
demand, all mean that there is now
a risk-adjusted, profitable business case
for taking sustainability seriously.
Challenge 6: Taking Sustainability Seriously
Background
Investment banks have an unprecedented
opportunity to finance, and thereby influence,
sustainable behaviours by businesses
and consumers
Properly addressed, sustainability plays a vital role in building
and protecting long-term business value
HSBC provides an example of what this for the purchase of low carbon assets (iii) Optimising and protecting assets
can mean in practice. Outgoing banks could provide bond issuance, Some investment banks have already
executive chairman, Stephen Green, integrated project finance, launched significant programmes
vigorously re-enforced the banks public asset-secured debt and loans, unsecured focused on valuation correlation for
commitment to be a leading brand in loans and/or asset leases. carbon intensive sectors. Goldman
sustainability and this objective remains Sachs GS Sustain initiative is one such
core to its strategic aims. HSBCs This level of investment is expected to initiative. Providing an objective,
success in rebuilding public trust saw it enable CO2e emission savings that will quantifiable framework linking the
surge up Fortunes Global 500 bring the EUs 2020 emissions on track impacts of structural trends in the
Accountability Rating reaching third to meet its targeted 20 percent carbon global economy, society and
place in 2008, up from 43rd place emissions reduction by 2020. environment on global industries to
in 2006. investment conclusions on a sector-by-
Additionally, cost savings from the sector basisxvi, this recognises the shift
reduction in energy consumption and in environmental and social pressures,
emissions are forecast. Outside the low as well as the expectations of investors
carbon technology sector, Deutsche on companies to address these issues
Bank estimates that water infrastructure and report on their performance.
globally will require up to US$22 trillion
of investment up to 2030xv.
Challenge 6: Taking Sustainability Seriously
110%
High
Accenture experts
To discuss any of the ideas presented in
i Green Investment Bank Commission report, available at this paper please contact:
http://www.climatechangecapital.com/news-and-
events/press-releases/green-investment-bank-
commission-report-ccc-e3g-joint-announcement.aspx Peter Lacy
ii Accenture analysis, based on capital requirements
Senior Executive, London
presented in GIBC
iii "Cost of tackling global climate change has doubled, [email protected]
warns Stern", The Guardian, June 2008
iv Bloomberg New Energy Finance
+44 20 7844 3427
v New York Times, June 2010 +44 75 0010 2928
vi United Nations Global Compact (UNGC) Accenture CEO
Survey, July 2010
vii Social Investment Forum, available at Shaun Richardson
http://www.socialinvest.org/resources/sriguide/srifacts.cfm London
viii Bloomberg New Energy Finance
ix 2010 Edelman Trust Barometer, available at
[email protected]
http://www.edelman.com/trust/2010/ +44 20 7844 4982
x United Nations Global Compact (UNGC) Accenture CEO
+44 79 1033 0933
Survey, July 2010
xi Fortune Global 500 Accountability Rating
xii Accenture analysis Justin Keeble
xiii Accenture analysis
xiv Green Investment Bank Commission report, available London
at http://www.climatechangecapital.com/news-and- [email protected]
events/press-releases/green-investment-bank- +44 20 3335 0682
commission-report-ccc-e3g-joint-announcement.aspx
xv WBCSD Vision 2050 report available at +44 78 1800 1688
http://www.wbcsd.org/Plugins/DocSearch/details.asp?Doc
TypeId=33&ObjectId=Mzc0MDE
xvi GS Sustain: Goldman Sachs Change is coming:
A framework for climate change a defining issue of
the 21st century May 2009
xvii GS Sustain: Goldman Sachs Change is coming:
A framework for climate change a defining issue of
the 21st century May 2009
xviii CDP 2010 Global 500 Report available at
https://www.cdproject.net/CDPResults/CDP-2010-
SP500.pdf
xix Accenture experience and analysis
Top 10 Challenges
for Investment Banks 2011
7 Delivering Valuable
Transformation
In the wake of the financial crisis,
investment banks are undertaking
large-scale programmes to deliver
transformational benefits and build
market share. Additional impetus for
these initiatives comes from ongoing
regulatory reform, with further impacts
looming in both the EU and US.
However, the results to date are mixed,
with much duplication of effort,
conflicts between initiatives and
wasted resources.
Challenge 7: Delivering Valuable Transformation
Background
Most investment banks have mixed
track records where large-scale change
programmes are concerned
According to Accenture research, There have been and continue to be
leading investment banks each spent an multiple motivations for these
average of US$570 million on transformation programmes, including:
transformational change the bank
initiatives during 2010. The same Emerging market growth:
investment profile is predicted for 2011, Achieving business growth ambitions
indicating that changes promised in emerging markets
during the crisis have not been Post-merger integration:
delivered. Furthermore, some banks are Realising the benefits from bringing
still awaiting tangible benefits from the capabilities of multiple businesses
the investment they have committed together
to date. Cross-asset views and services:
Developing consolidated client level,
cross-asset records to support
portfolio optimisation and to focus
on client needs
Cross-asset distribution:
Enabling cross-asset distribution from
global markets divisions to banks
private, corporate or retail banking
customers
Enhance risk management:
Strengthening risk monitoring
infrastructures in response to broader
and more intricate regulatory
demands
Challenge 7: Delivering Valuable Transformation
Post -merger
Emerging market
integration
growth
Finance
transf ormation
Cost
Low High
Regulatory Pressure
Challenge 7: Delivering Valuable Transformation
Benefits Realisation
An absence of clarity around how
projects deliver business impact
beyond being broadly valuable
Uncertainty as to whether long term
business requirements are being
comprehensively met
Unclear linkage of architecture
workshop activities to business
projects and how requirements are Misalignment around objectives
feeding into IT, who are often already between project stakeholders can
working on their future state drive a perception of slow delivery,
architecture which may not reflect actual
progress
Delivery Focus Project lists defined in the initial
A reliance on a small number of strategy phase not being tested on an
individuals for SME input who do not ongoing basis, preventing uniform
have sufficient capacity to complete agreement on the programmes
all requested tasks and may not priorities
even be the person closest to the Uncertainty around which individuals Methodology
issues at hand should be consulted for Programmes not having the flexibility
Unclear product scope that hampers requirements input and SME insight to accommodate developments in
high level objective setting and a rapidly changing business and / or
development of the ultimate solution Departmental and Regional Silos regulatory environment
Business functions and regions are Project individuals are not sure what
involved in projects to varying artefacts are required and by when
degrees and inconsistently Different projects employ different
Change initiatives are often launched communication tools
at departmental level with no Not all projects have documented,
overarching framework for formalised, signed off and
coordinated delivery communicated objectives, approach
Some projects are not making and scope
sufficient progress due to a lack of
engagement with key SMEs and
business functions
Challenge 7: Delivering Valuable Transformation
Negative Perception
Confusion
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Laurie McGraw
Senior Executive, New York
[email protected]
+1 267 216 1313
+1 917 687 7237
Suresh Kanwar
Senior Executive, London
[email protected]
+44 20 7844 8177
+44 77 7551 7627
Rob Deakin
London
[email protected]
+44 20 7844 1191
+44 79 8057 5954
Top 10 Challenges
for Investment Banks 2011
8 Harnessing Innovative
Technologies
Although innovative technologies
create exciting opportunities for
accelerating speed, efficiency and
profits, the challenge for investment
bank CIOs is increasingly: How can we
leverage maximum value from our new
technology investments by harnessing
them for the benefit of the whole
business?
Challenge 8: Harnessing Innovative Technologies
Background
Harnessing new technologies for the benefit
of the entire enterprise
Industry leaders are using new technologies to enable
interdependent business functions, from front-to-back trade
processing to enterprise risk management.
Reporting
High Speed Messaging >>
Counterparty Data
Network
Position
E - mail
Service Supply
Reporting
Chain Governor
Network
Source: Accenture
Challenge 8: Harnessing Innovative Technologies
Historical
Market, Liquidity/ Volatility
Counterparty Reports VaR
Sample Size
Stochastic Volatility
Reports
Parameter Tuning
Portfolio VaR
Monte Carlo
Heston
Risk Matrices
Implied Volatility Sample Size
Derman & Kani
Counterparty Credit
Market Data
Hardle
Sampling Rate Liquidity
Dupire
Reports
Pricing Models
Interpolation methods
Merton P&L
Bootstrapping 1-factor
2-factor
Calibration Parameters
3-factor
Focus Areas
Heath, Jarrow Morton
Benchmark Rates
Parameter Tuning
Interpolation Methods
Source: Accenture.
Challenge 8: Harnessing Innovative Technologies
Source: Accenture
Challenge 8: Harnessing Innovative Technologies
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Lloyd Altman
Senior Executive, New York
[email protected]
+1 917 452 0004
+1 917 514 1655
Kristina Klapper
Senior Executive, Frankfurt
[email protected]
+49 61 73 94 67306
+49 17 55 76 7306
Scott Reed
iWall Street & Technology, 2 December 2009
New York
[email protected]
+1 917 452 0020
+1 516 655 4121
Top 10 Challenges
for Investment Banks 2011
9 Engaging Effectively
in Emerging Markets
Many investment banks and their
clients - have identified emerging
markets as a key part of their strategy
to grow revenues in the future. To make
the most of these opportunities, banks
must identify targets that go further
than just those experiencing rapid
growth, to identify sustainable
opportunities for the long term,
including, but not limited to talent
availability, infrastructure investment,
regulatory environments and
competitor concentration.
Pinpointing the requirements needed
for successful, sustainable and
profitable entry, and then incorporating
these objectives into a truly global
operating model will determine
future success.
Challenge 9: Engaging Effectively in Emerging Markets
15,000
10,000
5,000
0
ia
a
a
ile
a
sia
ico
ia
n
e
a
ka
ey
il
d
di
in
re
in
na
in
ss
az
ric
lys
an
Ch
an
rk
ne
In
Ch
ex
Ko
ra
nt
Ru
et
Br
Af
ail
ala
Tu
iL
Uk
do
M
ge
Vi
Th
h
Sr
M
In
Ar
ut
So
Source: IMF, World Economic Outlook Database (April 2009), Accenture analysis
Challenge 9: Engaging Effectively in Emerging Markets
Be authentically local
Although searching for value in
emerging markets is a cross border task,
unlocking that value is a local exercise.
As tastes, customs, regulationsand
political environmentsdiffer widely; Network the organization
high performers embed themselves with Acting on knowledge from around the
full commitment in their chosen local world and executing company strategy
and regional markets as they execute in multiple locations requires the ability
their strategies. to transfer people, resources, capital
and know-how to the right places at the
Lessons from high performers: right time. Creating organizations that
Identify critical local differences in are permeable, both internally and
client preferences and usage and, in externally, enables flows of people, ideas
response, tailor products and services and best practices.
to new client segments.
Develop and mould local talent for Lessons from high performers:
today and tomorrow by investing Create structured channels to allow
across the skills spectrum. rapid diffusion of ideas and
Embed innovation activities into local knowhow across geographic regions.
research and development and Build a global backbone of
consumer environment, working in standardized data, systems and
tandem with industry peers processes.
and policymakers. Ensure global leadership to cultivate
Optimize resources strategy under a global mindset from the top down.
differing economic, cultural and
regulatory constraints across markets
and harness incentive regimes,
such as carbon trading, for current
and new business. Figure 2: Three maxims for emerging-market growth
Be willing to draw on a broad suite of
investment models tailored to the New clients Talent Innovation Resource Capital
characteristics of different markets. Sustainability
Reach out to Source talent Identity emerging Build resource input Improve access to
potential clients wherever it may exist centera of excellence security via team capital and diversity
in overseas markets geographically, as in different contracts, upstream risk by updating
Create with new business well as from sectors technologies acquisition and knowledge
models, channels of the population products and investment in relationships and
geographic and infrastructure that may have been processes around diversified financing models to
options investment that overlooked the world geographical sources reflect the new map
unlock otherwise previously such as of global investment
latent demand women and rural flows
workforces
Identity critical local Develop and mold Embed innovation Optimize resources Be willing to draw
difference in local talent for today activities into the strategy under on a broad suite of
clients and tomorrow by local research and differing economic investment models
preferences and investing across the development and cultural and
Be regulatory
tailored to the
usage and in skills spectrum client characteristics of
authentically response, tailor environment, working constraints across different markets
local products and in tandem with materials and harness
services to new industry peers and incentive regimes,
client segments policymakers such as carbon
trading for current
and new business
Create structured channels to allow rapid diffusion of ideas and know across geographic regions
Network the
Build a global backbone of standardised data, systems and processes
organisation
Ensure multi-polar leadership to cultivate a global mindset from the top down
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Jos Villar
Senior Executive, Madrid
[email protected]
+34 91 546 9229
iSource: Euromoney +34 61 924 9936
Dinesh Sharma
London
[email protected]
+44 20 7844 8288
+44 79 0991 5895
Top 10 Challenges
for Investment Banks 2011
Client Centricity
Clear client strategy based on segmentation
Client aligned Operating Model
Provider of integrated investment bank/ wealth/
asset management clients solutions
Product Depth
Recognised consistent strength across
FICC
Equities
M&A
Prime Services
Background Sustainably profitable in all chosen markets
banks need to choose where they can Two years ago, the banking sector was
compete and win in turmoil. Now, with the dust settling
on the financial crisis, investment banks
Top-three banks outperform across three key metrics global breadth, are seeking to take advantage of
client centricity and product depth market dislocation to seize market share
and propel themselves up the league
tables. It is not wrong to aim high. In
Particularly in todays straitened fact, this is in itself an effective way of
operating environment, it is surprising defending current market positioning.
that so many banks are actively aspiring But the priority must be to focus on
to top bank status (see figure 1). winning the right battles across the
Of course, each of the three key metrics three metrics shown in figure 2. That
of high performance Global Breadth, way, financial strength targets can be
Client Centricity and Product Depth realistically identified and emphatically
are as relevant as ever, but banks need achieved. To compete across this
to be selective about where they can framework represents a valid ambition,
realistically compete and win. Competing but only a few (very few) players will be
across all three simultaneously can able to achieve it and banks will need to
only result in under-resourcing, choose where to compete.
overbudgeting and, perhaps most
damagingly, incomplete execution.
800,000
600,000
400,000
200,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e
Year
Source: Dow Jones Factiva/ Accenture Research
Challenge 10: Picking the right battles
1
Comprehensive
Narrow Broad
Products / Services
Source: Accenture research
Challenge 10: Picking the right battles
Our perspective
Being in the right place, at the right time
Weve shown how vital it is for banks to When one market matures, theyre ready
focus their efforts and resources on with the next big thing; when buying
getting results. But what does this mean trends send clients in a different
in practice? Based on Accenture direction, theyre waiting at the end of
research and experience, we know that the path; when they acquire new
high-performance businesses have businesses, they do so wisely and tend
remarkable clarity when it comes to to them well. Add it all up and it means
setting their strategic direction. Put that high performers excel when it
bluntly, they always seem to be in the comes to their market focus and
right place at the right time. position the where and how to
compete aspects of business strategy
and one of the three building blocks of
Figure 4: The building blocks of high performance
Source: Accenture Institute of High Performance
high performance (see figure 4).
Market Focus
and postition-
maximising
business results
by targeting the
right place at
the right time
Performance Distinctive
Anatomy-out Capabilities-
executing developing
through offerings that
consistent, create a unique
competitive business
mindsets
Enter
Bank X: p2B 2
Enter My Bank: p1C
Payoff valuation for every
Bank X: p2C 3 Scenario derives from a
Bank X specific combination of
My Bank: p1D
Same
behaviour Bank X: p2D 4 action-reaction, through:
Enter Not Enter Cut prices
My Bank: p1E
Bank X: p2E 5 forecasting of future
Enter
My Bank: p1F
cash flows during the
Bank X: p2F 6 years if the analysis
My Bank My Bank: p1G discounting back to
Same
behaviour
Bank X: p2G 7 present the stream
Cut prices My Bank: p1H
Enter in 8 of future profits
Not Enter Bank X: p2H
Enter
My Bank: p1I NPV has to be assessed
Bank X Bank X: p2I 9 for the company and for
Same
Not Enter
behaviour My Bank: p1L
10 each of the other player
Bank X: p2L
takes part in the game
My Bank: p1M
Enter
Bank X: p2M 11
My Bank decides to Bank X reacts to MY Government reacts
enter or not enter Bank strategy, deciding to banks strategies
the market to enter or not the market deciding its behaviour
1 Home Team
Represents own company - intention
to test certain strategies or tactical
moves
Need to focus on early identification
and execution of dominant strategies
to succeed during war gaming
simulation (and then later in
the marketplace)
Results can sometimes be unpleasant
for home team (e.g. when it is
unveiled that strategy to be tested
has a low probability of being
successful/competitive)
1 Regulator/Government Teams
2-5 Competitor Teams
Represent and simulate the reaction
Represent and simulate real
of oversight bodies i.e. governments
competitors in the marketplace
and regulators
(i.e. peer group)
Team will determine political views on
Need to leverage competitors assets
strategic moves from Home and
and strategic intent
Competitor teams
As teams consist of executives from
Dependent on relationship strengths,
own company they typically know
the team will consist of direct
more than the market (i.e. strategy of
participation from oversight
home team to be tested is understood
organisations
in great detail)
1 Control Teams
1 Market Team
Consists of Accenture consultants
Represent and simulate the reaction
simulating outcome of strategic
of different customer groups or other
moves (e.g. market share, profitability,
stakeholders (e.g. hedge funds, asset
shareholder value) through a
managers, internal desks, acquisition
financial market model specifically
targets)
designed for each war
Team will determine how market
game individually
reacts on strategic moves from Home
and Competitor teams
Success Factors
It is worth bearing in mind that carrying
out competitive war gaming in itself
will not produce sufficient results; there
are four key factors that banks must
pay attention to, to ensure success:
Accenture experts
To discuss any of the ideas presented in
this paper please contact:
Lupus Maltzahn
Senior Executive, London
[email protected]
+44 20 7844 8544
+44 77 6887 1919
Ryan Westmacott
London
[email protected]
+44 20 7844 5259
+44 78 1030 4031
Ronan OKelly
London
[email protected]
+44 20 7844 0155
+44 79 4671 2749
i Michael Geogahan,
Chief Executive, HSBC
(speaking to Cantos, 2nd August 2010)
Challenge 10: Picking the right battles